Often times when people hear about A/R factoring, they think that it’s a sign a business is in trouble. The reasoning why is that if a business is trying to get paid sooner, they must be in need of capital, which means they’re running out of money. This is a grave misconception that needs to be put to bed forever. Understand that while there are many distressed companies out there in need of capital to survive, there are far more healthy businesses that simply need working capital in order to grow. Read on to learn how invoice factoring can help you grow your business.
Why Businesses Need Invoice Factoring
Many businesses need factoring for one of two main reasons, and sometimes both. The first is that there is a mismatch between the timing of income and expenses, and the second is that businesses need access to cash as they grow. If you have invoices and plan to hit new revenue levels, you should consider factoring to grow your business.
Mismatch Between Income and Expenses
Take a print shop as a classic example. A print shop spends money on ink, paper, boxes and shipping. They make money by selling a final product of printed goods to a company. In order to begin the job, the print shop needs to have the ink and paper handy, meaning they must buy it up front. However, they do not get paid until delivery of the final product or sometimes 30-60 days after that. Therefore, in order to take on print job, a print shop must have cash readily available.
Rapidly Growing Businesses Need Liquidity
The second reason is that a business that is growing rapidly may need to access cash in order to pay vendors, suppliers, employees and to start a new job. Take the print shop for example. If in the above example the print shop spends all their funds to deliver printed goods to ABC, Inc., they must wait until delivery or longer to collect the money from that job. At which point the print shop will be made whole on their costs, and they’ll realize the gross margins on the job. However, say for example that the print shop gets 3 new jobs they must take on. This requires additional capital to purchase more ink and paper.
How Factoring Invoices Can Grow Your Business
Upon delivery of the final product to ABC, Inc., the print shop will usually issue an invoice for payment to be received in 30-60 days. Once that invoice is in hand, the print shop can “sell” that invoice to a factoring company for 80-90% of capital up front. This allows the print shop to use those funds to take on the new orders that just came in. Invoice factoring allows entrepreneurs to grow their business by freeing up future cash flow to be reinvested today.
Note however, that if the print shop has favorable terms with ABC, Inc. and receives cash upon delivery, the print shop can secure PO financing. The moment ABC, Inc. orders and issues a purchase order to the print shop, the print shop and obtain funding based on the PO value. PO financing is similar to invoice factoring except that PO financing is used to start a job backed by someone’s intent to purchase the product upon completion. Invoice factoring is funding used to accelerate payment after the job is complete. While you’re looking for A/R factoring companies, you should ask if they offer both PO and A/R factoring. You want a full capital stack to grow your business.
As always, if you’re in need of factoring quotes or would like us to review existing offers, please don’t hesitate to contact us.