Effective Methods To Improve Cash Flow For Small Businesses
Improving cash flow is quite challenging for businesses, but if one manages to fix these issues one can gain great financial returns and take his business to the next level. Without required money on hand business owners cannot make payrolls, pay taxes, or bills. Managing cash flow, the right way will help one to make his business stronger in the long run. Among the various methods to improve cash flow, invoice factoring is one.
What is invoice factoring?
Also known as accounts receivable or debt factoring, invoice factoring is nothing but a mechanism used mainly by small businesses wherein they sell a few of their invoices to a third party at a discounted rate to improve cash flow and revenue stability. Businesses get immediate money for those unpaid invoices which are due within ninety days span. The factoring company will immediately pay the business the outstanding invoice amount and will collect it later directly from the client’s customers.
How does invoice factoring actually work?
The procedure for this mechanism is super simple. Here’s how it works:
Step 1: Businesses provide goods/services to their regular customers.
Step 2: Businesses invoice their customers for selling goods/services.
Step 3: Now it sells those raised invoices to the factoring company and in return the factoring company after verifying the invoices pays the businesses with immediate cash in bulk (almost 80 to 90 percent of the total invoice value).
Step 3: The customer then pays the outstanding invoice amount directly to the factoring company. If necessary, the factoring company also chases the customers for invoice payment.
Once they receive the full payment from the customers, the factoring company pays the remaining amount to the businesses after deducting a fee for their service.
Why do most small businesses prefer factoring?
Here are the major advantages of factoring:
- Predictable & improved cash flow– Through this method, one can get a bulk amount immediately to pay the immediate necessary bills. This particular method helps both small and large-scale businesses to plan and forecast more accurately.
- Makes the backbone of the business stronger– Better cash flow makes one’s business stronger. Often businesses fail to flourish due to poor cash flow. If one uses this method carefully one can get great benefits in the long run.
- Easier and cheaper method than a bank loan– When one takes a bank loan, one has to pay a hefty amount as interest against the loan. The fee for debt factoring is relatively much lesser than bank interests.
- Reduces business overheads– Though there are fees associated with this method of generating cash flow yet it is lesser than paying a team of dedicated professional credit control team. Moreover, chasing payments is one of the most hectic and stressful works done by businesses on a daily basis.
Invoice factoring is a great method for businesses to generate cash flow that has a huge customer base. However, this method might not be helpful for businesses with fewer customers. Also, if the customers are not quite cooperative this method might not work. Businesses need to assess their customer base and use this method wisely & tactfully to get maximum benefits out of it.