Tips for Successful Small Business Factoring
If you are in a seasonal off period, or now is the time for you to grow your company but you don’t have the operating capital to do so, small business factoring might be your answer. Invoice factoring means you sell your accounts receivables to a financer. You receive a portion of the total invoicing in cash; the funder collects on the invoicing. This works well for many short-term financial needs.
Why it Works
The reason why this option works is you receive outstanding cash right away rather than having to wait your net term for it. The funder purchases the invoices from you, so you have the lump sum in your pocket. You will not receive future payment on the outstanding receivables, however, so your short-term cash boost affects your long-term cash flow. Follow some tips to maintain solvency.
Tip 1: Make Sure You Know What You’re Getting Into
Look into several invoice-factoring funders to find the best one for you. Make certain to read each financer’s contract thoroughly so you have a complete understanding of the terms of each deal, because they will affect your ability to submit your application for financing. For example, some funders will not purchase your invoicing unless it’s a set amount. You also want to understand all fees and interest rates.
Tip 2: Book Your Invoice Factoring
You’ll want to book your small business factoring differently, as these are no longer accounts receivables. Keep track of the invoices you sell versus the ones you collect, so you can differentiate between the two. Also, ask the funder for monthly reports, so you can see which invoices were collected on your behalf. Separate these transactions on your accounting reports so there isn’t any muddling of funds.
Tip 3: Don’t Blast Through the Cash
The worst thing you can do is blow through the instant cash flow. You aren’t recouping those invoices at a later date, so use the immediate funds wisely. If you sold your accounts receivables to put a new item on your production line, make certain that item begins selling to recoup your factoring funds. If you sold the invoicing to get over a hump, use it wisely for expenses that keep your doors open and profits coming in. Be thrifty.
Small business factoring works well when you understand the terms of your deal, keep track of the monies separately and use the cash wisely. This is a temporary funding source, so treat it with care.