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Cash Flow Bottleneck? How Commercial Factoring Will Boost Your Business

Growing Business Charts

Do you want to bridge payment periods, quickly reinvest funds, or avoid the hassle of collecting invoices? Commercial factoring might be the answer (read what is factoring).

Far from being a simple convenience, it’s fast becoming a core component of many business models. Why? Because it provides the speed and flexibility a modern business environment demands.

Whether you need to use commercial factoring to get out of a cash flow crisis, or to integrate it into the heart of your business, check out what it has to offer.

The Basics of Commercial Factoring

It works like this: a factoring company evaluates an incoming invoice on your accounts receivable books and forwards you 70%–90% of the amount based on the credit-worthiness of the company on the invoice. Then, when the invoice is paid, you get the rest minus a fee.

It sounds simple, but it’s changing the way some businesses are operating. Here are the top reasons to start using commercial factoring today.

1. You Can Receive Money from an Invoice Quickly

Speed is at the core of commercial factoring. Whereas most invoices have payment periods of between 30 and 60 days, commercial factoring can get you the majority of those funds within 24–48 hours. This means you get the payment one or two months earlier than usual, and you can use that capital for whatever you need.

Having access to cash that much sooner means faster reinvestment and more flexibility. If a business opportunity arises, you can take advantage of it with your available funds right away. That kind of quick response time and increased cash flow translates into a huge competitive advantage for your company.

2. Your Customer's Credit Is the Focus, Not Yours

Whether you and your business have fantastic credit or not, having to constantly check your score for the sake of obtaining a loan is a hassle and can actually hurt your credit score. But with commercial factoring, the focus is entirely different — your credit standing is not under the loop, and it’s not affected in any way. The only relevant piece of information for the factoring company is the financial soundness of the customer on the account receivable end. It is important to think about this difference when choosing to use either invoice factoring or a bank loan.

So if you’re selling in bulk to large retailers, factoring can be an ideal business strategy. The more secure your customer are, the better rate you’ll get from the factoring company. The benefits of commercial factoring also extend to one of the terrors of the business world — paperwork.

3. There's Very Little Paperwork

It doesn’t matter whether you run a big business or a small business, whether you’re a wholesaler or a technology company — less paperwork is about as close to a universal good as you’re going to find. Commercial factoring involves less paperwork because it’s an inherently simple process.

Another reason there’s less paperwork is simply because you’re not dealing with a bank and, let’s face it, banks love paperwork and that’s why most of us don’t love them.

4. You Bypass Outside Investors and Selling Equity

One common solution to cash flow problems is to sell equity. It’s the basis for growing trends like startup accelerators. But if your business is established enough to be in a position to use commercial factoring, there’s no reason to go back to selling equity.

Put simply, considering how valuable your equity is, why sell it simply to increase your cash flow one time? Commercial factoring is a repeatable action and a sustainable practice. Not to mention the difficulties that bringing in outside investors can create for a business. You can always keep your management and ownership structure and avoid the hassle instead.

5. It's Much Easier to Do Business Internationally

Taking your business internationally can enormously increase your sales potential, there’s no doubt there. But the devil is in the details. Establishing international business relationships and handling the logistics of payments and shipments can be a nightmare. This is one reason why commercial factoring is a popular practice for companies that do business overseas.

The reason is that major factoring companies have already built extensive global networks of business relationships. So while it may be your first time dealing with a South-East Asian distributor, your factoring company may be an old-hand in the region. Thus, by leaving the task of collecting payments to them, you’re gaining the benefits of that international relationship without investing valuable time and resources.

It's Time to Consider Your Options

Of course, commercial factoring isn’t the only way to collect on your accounts receivable through invoice financingInvoice discounting services like FundThrough can save your company from cash flow problems or slow-paying customers without handing over the collecting of those invoices to an outside company.

The choice simply depends on your company’s needs and what will work best for your business model. So learn more about the possibilities, and choose the financing method which will best support your business’ growth.

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