Just as house requires a solid foundation to be structurally sound, a business needs a solid foundation to be financially sound. If you don’t have a firm financial footing, your business is a house of cards - a house that will come crashing down as soon as the wind blows.
How do you pour a solid foundation for your business? What does a financially sound business actually look like? It is just about turning a profit or is there something more that you need? How can tools like invoice funding improve the stability of your business?
The Importance of Capital
A financially sound business is one that has enough capital to:
- Operate
- Survive tough times
- Grow
Invoice funding can help in all three areas, but first let’s really talk about these areas specifically.
Operate
The most basic requirement is having the cash to keep the doors open. You need enough cash to pay bills, purchase inventory and materials and make payroll. The key to all of this is having enough capital to deal with the timing difference of cash inflows and outflows. You have to make payroll every two weeks, but your customers only pay once per month. You have to be able to cover that timing difference.
Survive
After you’ve dealt with having the funds to keep operating, you also have to prepare for times when business slows. This could be a seasonal issue where you know business will be slower at certain points in the year or it could be bigger economic issues where your customers just don’t have the money to keep using your product or service.
Grow
Finally, once you’ve covered the week-to-week timing issues and prepared for inevitable downturns in business, you need capital to grow the business. Marketing, new equipment and additional employees aren’t free. You need some extra funding to cover the transition period until the additional revenue catches up to the additional expenses.
Invoice Funding is a Great Source of Capital
The biggest reason that small businesses run short of cash is that their customers take too long to pay.
You have to offer terms to your customers. Very few businesses can get by using a cash only model. It’s not unusual to give your customers 30 or 60 days to pay. In some industries, you may even have to offer 90 day terms to be competitive.
Waiting 2 or 3 months for cash to come in creates a big timing problem. Invoice funding helps bridge that gap. It allows you to get cash as soon as you invoice, but still gives you the ability to offer terms to your customers and remain competitive.
How Invoice Funding Works
Invoice funding is just another name for factoring. Factoring is a huge part of the finance industry. In 2012, nearly $3 trillion was factored worldwide. Factoring is a tool that allows you to unlock the cash that’s tied up in your accounts receivable. With factoring, you’re able to leverage what is likely the largest current asset on your books – your accounts receivable.
The process works by assigning your receivables to a factoring company. The factoring company gives you an advance against those receivables. Your customer pays the factor and the factor sends you the balance of the invoice less their fee.
In some ways, factoring is no different than many other forms of financing. It gives you access to funds you can use to run your business. Factoring, though, provides flexibility unlike any loan and is specifically designed to meet the needs of small and mid-sized businesses.
Invoice Funding Provides a Solid Foundation for your Business
Ready access to capital is what makes a business strong. That capital can be cash in the bank or having some type of financing in place. The end result is that your business can operate, survive and grow no matter what may come your way.
It’s rare for a small business to have piles of cash in the bank and it’s tough for them to get a loan from a traditional bank. Invoice funding provides all of the same benefits, but is easily accessible to small businesses. Invoice funding provides the firm financial footing that your business needs to succeed.
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