Throughout the lifespan of your business, you have probably had times when your cash flow was a little lower than you would have liked. This happens to most businesses from time to time. However, you still have responsibilities despite your low balance. You need to pay staff, operating expenses, and other costs. Therefore, these are some things you should know about factoring and how it can help.

Business-to-Business Invoicing

If you own a business, you probably receive special benefits from your vendors. One of those is the ability to receive your raw materials and goods immediately and pay later. However, if you sell to other businesses, you likely operate on the same policy. You may deliver goods and must wait a period before you are paid. If you run into cash flow shortages, your invoicing policy can be both a detriment and a benefit.

For example, you can’t depend on your customers to pay their bills immediately or before they receive their goods and services. However, you can still get money from these invoices when you need it.

Invoice Financing

Another option you may have for temporarily improving your cash flows is invoice financing. In this case, the financing company reviews your outstanding invoices and gives you a loan based on their balance. You must pay this loan back, but you retain ownership of your invoices. You also don’t have to use all your invoices to finance the loan. You can choose specific invoices instead.

You will still be responsible for collecting on these invoices, so you are taking the risk. However, your privacy is maintained because you are communicating with both your financing company and customers.

Invoice Factoring

If you have outstanding invoices, you can sell them to a factoring company. The company will charge a fee or discount the invoices, so you won’t get the full balance of your invoices, but you will receive the cash immediately. Understand that the factoring company is purchasing these invoices, so they no longer belong to you. In addition, your customers will likely learn that you had to sell their invoices.

This option should only be a temporary solution and should not be the basis of your cash flow. Instead, you should have a robust accounts receivable process that encourages prompt payment from your customers. However, this option can help during a slow week or month.

If you are experiencing cash flow shortages, you may be considering using your invoices as leverage to increase your cash flow. Do your due diligence to determine whether factoring or financing is the best option for your company.