How Does Factoring Improve Cash Flow?

Posted by Factor Funding Co. on February 22, 2013

If you own a small business, you're likely familiar with the cash flow problems that crop up from time to time. Between making payroll, covering sudden expenses, and paying for typical business costs like advertising and taxes, you may have watched your cash reserve dwindle down considerably. Unfortunately, many entrepreneurs have found that traditional banks and financial institutions are somewhat unsympathetic to these issues and may not approve their request for a business loan or line of credit. Invoice factoring, though, offers a flexible funding source that can improve cash flow in a matter of days.

Common Cash Flow Problems

Most successful businesses begin with a large amount of cash reserves. According to some experts, a small business needs to have at least nine to twelve months' worth of income saved up before launching. But, if your costs and expenses have overwhelmed these savings, you may find that you're unable to pay for your regular operating expenses or to undertake the expansion plans you have in mind. Even worse, a cash flow crunch can really cause problems when it's time to send in your quarterly payroll taxes.

What Invoice Factoring Involves

So, how does invoice factoring work? All you have to do is sell your customer invoices to a third-party factoring company. The company will look at the total worth of the invoices and then send you a check that is equal to most of the face value. After issuing your check, the factor will wait for your customer to pay the invoice in full and then send you the rest of the payment. Typically, the factor deducts its fee from the second payment before remitting it to you.

How Invoice Factoring Improves Cash Flow

When you use invoice factoring, however, you get almost instant access to cash that you can use for any business purpose. Unlike a bank, a factoring company will issue your cash payment within just a few business days. Since you're factoring out invoices that you were already expecting payment on, you don't have to take out any additional loans or open new lines of credit. You're simply collecting your payments a bit earlier than usual. In the meantime, you're free to generate new business or develop new marketing plans to attract new customers.

How does factoring improve cash flow? It helps you to get paid faster, which boosts your cash reserves right away instead of waiting one to two months. With more cash in your pocket, you can get to the business of growing your company without delay.

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