Invoice Financing the Smart Way: 6 Steps to Supercharge your Business

Posted by Jeremy Waller on Mon, Jul 07, 2014

Every business needs capital to operate. There are a lot of small business bootstrapping it with personal savings, credit cards and loans from friends and family members. There’s nothing wrong with any of that, but at some point you will hit a limit. The problem is many businesses hit this limit and get stuck. They’ve tapped all of their resources and aren’t able to get a bank loan for one reason or another.

Invoice Financing

Invoice financing, also known as factoring, is the perfect stepping stone to keep your business going and growing strong. It provides access to capital just like any other form of financing, but it also does so much more (and most business owners don’t even realize it!) Here are 6 tips to get the most out of your factoring facility.

1) Factor Your Best Customers First

It seems counter-initiative, but you should factor your best customers first. Most people think that slow-paying customers are the primary candidate for invoice financing. The point is to improve your cash flow and slow-paying customers hurt your cash flow the most, right? Yes, but your slow-paying customers will be the most expensive to factor.

Factoring fees are based on the amount of time that the invoice is outstanding. The longer the invoice is outstanding, the more you will pay to factor it. That’s pretty straight-forward, but think about this. If the goal is to bring cash into your business quicker, does it matter which invoice that cash is actually coming from? When you’re cutting checks, do you pick and choose which vendors get paid based on which of your invoices have been paid? Of course not! You pay based on which payables are the most urgent and how much cash you have in the bank.

By factoring your best customers, you still get cash quicker and you pay a lower rate. You’re getting the same amount of money for less. Factor your best customers first.

2) Don’t Just Pay Bills, Gain a Competitive Advantage

Don’t use invoice financing with the mindset that you’re doing it just paying bills. Think about it from the frame of improving your business. Having better cash flow doesn’t just help you sleep better at night; it gives you a competitive advantage.

Increased cash flow allows you to purchase higher quality inputs, invest in more efficient processes and it gives you the ability to move quickly when an opportunity arises. When cash flow isn’t an issue your business stops living “paycheck to paycheck.” You stop just trying to survive and start thinking about how you can serve your customer base better. You gain a competitive advantage.

3) Take Advantage of a Factor’s Back-Office Services

Many people don’t realize that a factoring company is more than just a source of funding. It provides risk assessment of your customer base and collection services. You have access to numerous metrics on the performance of your individual invoices, your customers and your overall account. It frees you from having to deal with invoice submission – the factor will mail and/or e-mail your invoices and any backup to your customers.

You also have access to experts in the industry who have seen the situations that you’re facing. The life of a small business owner is often a lonely one. It’s difficult to navigate uncharted waters alone. It’s unlikely that your company is in an industry that the factor has never seen before. Chances are, they’ve seen numerous other business in the same industry and can provide insight that you can’t get on your own.

4) Smooth-Out Irregular Cash Cycles

You don’t have to have cash-flow problems to take advantage of invoice financing. You may have a seasonal business that cash flows just fine, but you have the headache of dealing with the timing issues that come with having a seasonal business.

Factoring makes it extremely simple to control the timing of your cash inflows. When you don’t have to deal with the headache of timing issues, you can focus on the parts of your business that actually make you money.

5) Capitalize on Price Drops on Raw Materials and Other Inputs

If your business relies on raw materials or other supplies with volatile prices, factoring is a great way to take advantage of price drops. Factoring gives you instant access to cash. When prices drop, you have immediate access to capital to stock up on your materials while prices are low.

The same may be true for other inputs in your business. Maybe you have a contractor looking for work that will offer you a deal. Maybe you’ve found an incredible temp employee that you don’t want to pass on. Maybe now is the perfect time to wrap up a project that you’ve been dragging along for months.

The point is, when you see an opportunity to get your inputs at a discount, factoring provides easy access to the capital to do so.

6) Use Factoring for Tax Planning that puts Cash Back in Your Pocket

Taxes are not something that should be considered after the fact. Don’t wait until you’re meeting with your CPA after year-end to think about your business’ income taxes. Effective tax planning puts dollars in your pocket in the same way that increasing sales or reducing expenses does.

One of the easiest ways to have a positive impact on your tax bill is to defer profit by incurring expenses today that will provide economic benefit in a future period. Invoice financing can give you a pile of cash right before year-end that you can use for this kind of tax planning.

Factoring Has the Tools You Need to Win

Winning in a small business is about using your limited resources to achieve maximum results. Part of this is related to how well you manage the resources you have and part of it is leveraging those resources to get the best bang for your buck.

Invoice financing is that leverage to move more with less. When your cash turns quickly, your business can be flexible and agile. You have the ability to move quicker than your competitors and seize opportunity when it arises. Those qualities are what cause businesses to win.


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Tags: Cash Flow, Accounts Receivable Factoring, Small Business Factoring