From time to time, most businesses experience cash flow shortages or bottlenecks. Given out current economic condition, supply-chain concerns, and the fears caused by the pandemic, cash-flow shortages are becoming even more common. This is especially so for businesses that issue invoices for work or services rendered. 

There is an elegant solution available for smoothing out cash flow for businesses that issue invoices. It is called invoice factoring. Perhaps your enterprise could benefit from it.

Invoice Factoring in Brief

Invoice factoring has been around for centuries. In essence, it works like this: One business sells its outstanding unpaid invoices to another in return for quick, up-front payment of cash. The buyer of the invoices then takes on the responsibility to collect these unpaid invoices. The buyer does not pay 100% of the value of the unpaid invoice; instead, it pays a high percentage, generally about 90% or more, of their value.

There are obvious benefits to both sides in invoice factoring. For the seller of the invoices, there is a quick infusion of working capital, providing liquidity for ongoing business operations. In addition, the seller does not need to try to collect on these unpaid invoked anymore. For the buyer, there is the opportunity to make a profit because he or she has paid for the right to collect at a discount to face value.

Benefits of Invoice Factoring for Your Business

The benefits of invoice factoring for a small- or medium-sized business that issues invoices can be summarized, then, as follows:

• Speedy Arrival of Cash. Once approved, an infusion of working capital arrives in a matter of days.
• It’s Not a Loan. You are selling a batch of invoices to a financial agency who will then take on the responsibility of obtaining collection. You don’t have to pay it back because it is a sale, not a loan.
• Simplified Application. The application process is short and sweet, and a decision is typically rendered within a few days.
• Your Credit History Is Not a Show Stopper. For many forms of financing, your credit history is very important. Not so with invoice factoring. That’s because the buyer will be more interested in your customer’s ability to pay, not yours.

Summary

Invoice factoring is an elegant and simple solution to keep cash flow bottlenecks from causing problems in businesses that issue invoices.  If your business sends out invoices for payment, consider the benefits of this age-old method of smoothing out your cash flow.