Lack of adequate working capital makes it hard for a business to exploit new opportunities and there are instances where businesses experience some challenges in cash flow where a lot goes into the business yet there are various expenses to cover or outstanding charge accounts go unpaid. Businesses require resources to bridge their cash flow gaps or means of leveling out during these cash-strapped periods.
As a result, companies often turn to factoring account receivables where they sell their outstanding accounts to a third-party that then attempts to collect the payments for themselves. If you do not yet employ this practice, below are 4 ways factoring receivables can immediately help your business.
1. Increase available funds quickly
Selling outstanding invoices to other companies can helps a business access the cash value of them when it experiences a serious cash flow challenge. This cash gives the business some breathing space, allowing for money to be available and accessible for things such as utilities, supplies, and salaries. Instead of waiting the typical 30 to 60-day time limits given for outstanding invoices to be paid by customers or taking on more debt to cover expenses, companies can choose to factor their receivables and get the cash they need significantly quicker than this, usually with days.
2. Less interruption
If your business deals with a large number of big clients, your cash flow is likely to be tight before they pay because of the time it can take to process invoices through finance departments typical of these bigger corporations. Factoring your receivables will allow you to avoid becoming a victim and experience cash shortages because of slower processing times that should not be your problem in the first place. The process will allow you to transfer the problem of outstanding invoices to a third party. You will have the cash of the invoices in hand and you can then get back to concentrating on your business and continued success.
When a business is experiencing cash flow problems, honoring its payroll becomes difficult and this can affect employee morale in a huge way. Factoring your receivables can help your business by increasing its cash flow and avoiding the worry of not having enough to pay employee’s salaries. This increases your employees’ security and day-to-day operations will be consistent or even improve due to their positive morale.
Unlike obtaining a bank loan that may require you to guarantee your home, vehicle, or even the business itself as collateral, the third party that you are looking to sell your invoices to often only looks at the accounts themselves for security. This means that you are not at risk of losing anything in the event the purchaser is unsuccessful in cashing in on the accounts sold to them.
4. Increased financial flexibility
Businesses face instances where client demand wanes thereby exposing them to cash flow issues. For example during different seasons, the company can receive a major influx of business but during the other seasons this rate might decrease. The option of factoring your account receivables will help your business manage its affairs during the lean seasons and provide you with an easy way of ramping up your capital whenever it is deemed necessary.
In order to succeed in business, you must ensure that your company is ready for any variations and this option is one of the best to cushion it during times of less prosperity. Owning a company means constantly trying to find ways to positively impact your bottom line, respond to needs of customers, and keep up with the competition. Factoring receivables can help a business exploit any opportunities that may arise that could help achieve these goals without having to worry about a poor financial situation due to outstanding invoices.