Why is it in New Zealand we, as a nation of SME businesses, do we avoid this type of funding? Yet in the UK, Europe and the USA it is a fully utilised way of funding a business, in fact it’s the most popular way.
It’s a way of funding your business that doesn’t involve your house. Yet in New Zealand we seem so keen to give our bankers our houses in order to secure funding.
Extending credit is a great way to encourage sales. But while you wait for the customer’s payment, you have real needs for that cash: inventory must be replenished, overhead costs aren’t on layaway and need to be paid, and employees expect their paychecks at the same time every pay period. But where will the cash come from?
Factoring is selling the value of what your customers owe you before they pay it.
Accounts receivable represent sales that have not yet been collected as cash. In the worst-case scenario, unpaid accounts receivable will leave your business without the necessary cash to pay its bills. Accounts receivable also represent an investment, which means the money tied up in accounts receivable is not available for paying bills, paying back loans, or expanding your business. This can all be summed up as a lack of liquidity. Your business can make a substantial profit but still suffer illiquidity. Got constipated cash flow?
Full Factoring means that the factoring company that purchases your receivables takes title to the invoices and collects them when they are due. That company also assumes responsibility for all of the costs, and, if you are willing to pay for it, all the hard work and hassle that comes with customer debt collection.
Spot invoice funding means that you, as a business, only fund what you need. This gives you more choice and freedom. However, you are responsible for the debt collection as normal.
Factoring and invoice funding is generally used by rapidly growing businesses that face temporary cash flow problems. Except in certain industries, factoring is not generally used on a long-term basis. This means no long term contracts to handle. No term of life loan!
Speaking of contracts and borrowing, many businesses don’t recognise the opportunities. Invoice Funders don’t require you to submit rafts of documents, credit reports, tax returns, financial statements or your firstborn son. They are only interested in the creditworthiness of your customers whose accounts they are buying.
Here are a few ways in which accounts receivable factoring can benefit SME businesses and provide them with the ability to operate like big businesses:
- Invoice factoring provides businesses with much needed cash that can be used to pay vendors, buy supplies, pay employees, or pay for other business expenses. Often you can look at supplier discounts too because you can pay in a timely manner.
- When businesses choose invoice factoring, they can focus more of their attention on product development and on growing their business – they have the funds to do this.
- There is no delay in receiving payments for outstanding invoices when businesses utilize invoice factoring. As soon as its invoices are sold to an invoice factoring company, the amount due on the receivables (minus a discount) is paid.
Invoice factoring boosts a business’s cash flow, and it boosts it fast. If you own or operate a business, and if your business could benefit from a positive cash flow, it’s time to explore invoice factoring to get your outstanding accounts receivable paid. While many business owners elect to apply for business bank loans and overdrafts when they are in need of immediate capital, bank loans involve debt that must be repaid. The burden of taking on excessive debt can be overwhelming and even detrimental to some businesses. Not to mention the fact that bank loans are not even a viable option for some businesses.
Invoice fundng and factoring isn’t right for every business in every industry – but it’s a good choice for quite a few of them! If you are the owner of a business and you either don’t want to explore a bank loan or you’ve been denied a bank loan, you have options. If your business will not only survive – but THRIVE – with a positive cash flow, invoice funding and factoring is well worth exploring. Accounts receivable factoring has assisted many businesses in achieving their ultimate success.
Contact us now to see how we can help you.