You might be looking for working capital to grow your B2B business, get a little help to pay bills, or bring costs down by buying in bulk. Like most small businesses, cash flow fluctuates in yours. It always seems to work out that when you need more cash, it’s not available.
One way to raise working capital fast is to chase down late payments and get them paid. That’s a real headache and stressful. Contacting your clients to request payment saps your energy. This energy would be better put to use on the things you want to work on. Selling equity in your company is another way to get money quickly.
You don’t need to do either of these things. Nor do you need to go to a bank for a small business line of credit or bank loan for your B2B company. This creates new debt.
The answer? You can get B2B small business funding through invoice financing, or factoring. The way it works is that a factor — financial services company providing the service — buys your unpaid invoices at a discount. Once the factor collects payment on the invoice, you get the remainder of the balance sans the factoring fee.
This small business financing is ideal for B2B companies with an accounts receivable balance and customers who don’t pay fast enough. Factoring won’t work for retailers and B2C companies that sell directly to consumers.
Why is invoice financing for B2B companies better than line of credit, bank loans, merchant cash advance (MCA), and other funding options?
Here are 10 reasons choose invoice financing for working capital.
1. Get cash faster
It only takes a few days to sign up with a factor and complete the initial setup. As soon as everything is ready to go, you can get your money within 24 to 48 hours after submitting an approved invoice. Sometimes, you can get the cash within hours. The entire process takes less than a week. Much faster than a bank loan or line of credit, which can take months before you see the money.
2. Take on zero new debt
A bank loan, line of credit, MCA, and other financing options add debt. You’ll have to pay back the money from your bank account. With factoring, the money is already yours. Factoring fees come out of the invoices, not out of your bank account. Essentially, you never see your balance shrink. Invoice financing boosts your cash flow.
Some financing services like to say that a loan or MCA is better because you retain equity. So does invoice financing. You keep 100 percent of your equity, add zero liabilities to your balance sheet, and shell out zero monthly loan payments.
3. Cut stress
If you need to pay bills or make payroll, just submit an invoice to the factor and problem solved. You won’t need to make the uncomfortable call to clients to request payment. Imagine being able to go to the office and work on the things you want to do. No more spending time contacting clients to request payment on their invoices. No more worrying about late fees and its impact on your credit.
4. Control funding
Factoring is flexible financing. You can submit one, some, or all of your invoices. You can do one and done. It’s up to you. It can be your Plan B for emergencies. Or submit two invoices more than a year apart. Unlike with bank loans and MCA, you have no long-term contracts, minimums, or maximums. Invoice financing’s flexibility allows it to grow with your business.
5. Pay lower fees via invoices
Merchant cash advance has heart-stopping high fees. Not all MCA fees are apparent when you first sign up. Banks have a variety of fees. Factoring’s affordable fees vary based on industry, advance rates, client creditworthiness, number of invoices submitted, and time it takes for clients to pay. Depending on the factor you work with, fees tend to be minimal compared to fees from bank loans, line of credit, and liquidating assets.
Moreover, you don’t paying anything back. You receive money save for a small amount to cover the factoring service. With invoice financing, you don’t touch your coffers to pay financing fees. It comes out of the invoice.
6. Provide less company information
A factor doesn’t need to know your company’s financial standing, creditworthiness, how many years you’ve been in business, or whether you have collateral. Factors look to your clients’ ability to pay their invoices. This can be especially helpful for businesses that run into credit or business bumps in the road.
7. Maintain control
Banks and some financial lenders dictate how you can spend the money they loan you. They may require you buy equipment and other assets instead of paying bills or employees. In invoice financing, the money is yours to do with it as you see fit.
8. Extend terms to customers
A factor can help you underwrite your new or existing clients’ ability to pay to help you avoid extending terms to high risk candidates. As you increase sales and add new or large clients, you can offer credit terms to them without worrying about how it affects cash flow. In short, cash management will be easier.
9. Gain back office support
Having a factor on your team is like adding an employee who takes care of the paperwork, processing, and collecting payments on your invoices. All your headaches of doing these activities will go away. The time you gain from not doing these administrative activities is time you can put into revenue-generating tasks that will grow your business.
10. Increase bottom-line
Obtaining working capital when you need it allows you to take advantage of early payment discounts, negotiate bulk discounts from suppliers, increase inventory for big jobs, add staff for bigger projects, and buy buildings to support your business. These activities will expand your business.
Because you get your money faster with invoice financing, you can make money in excess of factoring fees. For example, you use the working capital from invoice financing to get discounts from vendors. That discount easily exceeds factoring fees.
Bonus tip
Something you want to watch for is whether the factor is recourse or non-recourse. Recourse requires you to buy back an unpaid accounts receivable from the factoring company or replace it with a current accounts receivable of equal or greater value. A non-recourse factor takes on the risk of non-payment.
Invoice financing makes it possible for B2B companies to convert the invoices of slow-paying customers into instant cash. It’s not a loan you pay back. It’s your money and you can use it wherever you want whether it’s to expand business, pay bills, make payroll, buy something, or overcome an unexpected expenses. Your cash flow problems will be a thing of the past.