Why Invoice Factoring Helps Companies Overcome the Problem of Unpaid Invoices

Did you know that over 80% of startups fail because of their cash flow practices? Unfortunately, this is the bare truth. Your ability to handle cash flows is independent of the industry in which you operate, incredible products, and the amount of time and financial investments you pump into the business. 

Your enterprise’s cash flows play a significant role in ensuring that it remains operating in a healthy position. As a businessman, you will require tools and strategies to keep your finances trickling in to meet your recurrent expenses like the rents, wages, salaries, and other essential bills. 

Surprisingly, even the most successful ventures tend to face challenges with their cash flow. At times, these inconveniences could result from the lag between the production and delivery phases and the time when the client makes the expected payments. In these times, every entrepreneur will run deep in thought, looking for a solution when cash flow issues arise. 

Invoice factoring comes in as a solution for entrepreneurs struggling with cash flow challenges. This is a form of financing that every entrepreneur needs whenever they are faced with cash flow challenges, and taking one of those pocket-draining overdrafts or quick loans that your bank or lender is always enticing you to apply for. 

In essence, invoice factoring is a great financing option for businesses that receive their payments in the form of invoices. Most businesses that accept invoice payments face grave difficulties in reconciling their incomes and expenses to minimize cash flow challenges. 

Invoice factoring businesses such as ezinvoicefactoring.com provides asset-based funds that expect the desired money to be refunded soon. This method works best for entrepreneurial ventures that expect their invoices to honor payments within a short time frame while enabling current cash flow.

What is Invoice Factoring?

Invoice factoring is a form of invoice finance whose operation principles greatly rely on the ability to initiate effective control of the associated sales ledger. In essence, invoice factoring involves selling the unpaid amounts raised on one or more of your enterprise’s outstanding invoices to an invoice factoring business. In this case, the business that acquires the unpaid portions is considered as the factor.

In this case, the factor agrees to pay you the amounts indicated by the invoice while benefiting from a small percentage. As such, the factor acts as a type of lender who agrees to take control of your sales ledger and then moves to collect your client’s payments.

Critically, invoice factoring has emerged as one of the low-risk financing methods as it cushions your business from the challenges associated with cash flow interruptions and can shield you from defaulting clients in some cases. There is a greater possibility that the financier will work to ensure that the money is returned.

Your business can take advantage of this upfront capital to release untimely cash flow challenges while releasing the money tied up in unattended invoices. In simple terms, invoice factoring allows you to be paid earlier, giving you the working funds you will need to pay your bills.

How Invoice Factoring Works with Firms like Ezinvoicefactoring.com

Invoice factoring targets enterprises that use invoices as a payment system. However, there’re conditions to be met for a venture to adopt invoice factoring as a method of raising instant capital finances.

In essence, your invoice needs to have a term ranging between 30 and 90 days to qualify for invoice factoring. You’ll also require one to two days to get the money from the factor. There’s a process where the factoring agency will take time to check your degree of creditworthiness before releasing the funds, as they’ll want to ensure that they don’t risk their resources by engaging with a risky client.

Most factors will pay your invoice’s value in two installments to your venture minus a small fee. Typically, the installment will be 80% of the value of the invoice and will be deposited in your business bank account. Your venture could take advantage of this deposit (as working capital) to invest, pay staff, expand and settle bills.

The second installment comes after the client has settled the invoice factoring agency. However, it is essential to note that the lender takes over the sales ledger when you consider invoice factoring rather than receiving the payment directly from your client.  

In this case, the client will have to channel the payments through the accounts used and controlled by the factoring institution. This process relieves your business from the burdens of initiating the credit control procedures like chasing the non-complying customers. You will have enough time to produce and sell while engaging a third party to acquire your money from the clients, take their percentage and leave you with the larger portion to continue with the production process.

When Should a Company Resort to Invoice Factoring?

A range of scenarios may push an organization towards adopting invoice factoring as a method of financing. Here are the instances to adopt invoice factoring if your business has run out of options:

  • When you need urgent cash and your working capital is below a certain margin
  • When you don’t have collateral after asset aggregation
  • When you have inadequate debtor follow-up resources

Your situation may be different but these aspects present above represent the broad range of situations present.

How Invoice Factoring Solves Cash Flow Issues

You must be aware that the client or debtor’s amounts on your account’s records are considered assets to your business. But why keep assets that don’t give your company the value it needs in time? Well, just like the other assets owned by your company, debts or accounts receivables can be sold.

Invoice factoring allows you to dispose of your debt as an asset whenever you want instant access to money. You may take advantage of this system to serve your clients with credit terms with the confidence that you’ll get back the money straight away.

How Invoice Factoring Will Help Your Business to Overcome the Challenge of Unpaid Invoices

Here is how invoice factoring will give you an easy time whenever you want to sort out an unpaid invoice that may be derailing your progress.

The Speed

Invoice factoring will help you tackle the challenges associated with unpaid invoices by providing considerable sums of money in more secure and fast ways. Most of the factoring institutions will provide you with the cash requested within 24 hours following the successful creation of the invoice. The speed with which the finances are processed explains why you need to consider invoice factoring any time your business is battling with unpaid invoices.

You Will Not Need Security to Access the Money

The traditional financing firms have stringent methods when vetting your eligibility to access loans and other financial assistance. Most of the banks will require your assets as collateral for the money they will lend you. However, invoice factoring cushions you from these requirements as they won’t need extra security apart from the invoice being factored.

In essence, the factoring institution completes the financing process with the knowledge that your customers are aware of their obligations.  Therefore, the outstanding invoices are adopted as collateral

The Factoring Institution Acts as an Effective External Debt Collector

You won’t need to struggle with the clients who owe you whenever you seek an invoice factoring institution’s services. In essence, invoice factoring is a unique financing technique. It almost always gives the lender the mandate to follow up with the debtor and collect the cash owed as you continue with your day-to-day operations.

It’s in the lender’s hands to initiate follow-ups with clients who make late payments while dealing with those that remain adamant when the time to pay reaches. This allows you to free up valuable resources and time in your business to be directed to other plans and ventures that will foster growth.

Reduced Risk

Invoice factoring goes to record as one of the risk-free forms of financing a business. It is low-risk both for your business and the factoring institution. You are guaranteed your financial safety as a business owner by having the confidence that your clients’ money will come in weeks or a few months. This eliminates the pressures of engaging in long-term debts. 

The fact that the lender has the confidence that the money will come puts your business at an advantage. The factoring company has the opportunity to see where the money lent will be coming from, and they will have total control over the debtor. This gives you the added advantage of accessing the finances you need at a cheaper rate than other short-term financing options that the market can present, like onerous advances.

In a nutshell, invoice factoring allows you to run your business with utmost effectiveness even when you have millions of dollars in debt. This financing option allows you to use the money owed to your business by your clients before they initiate the necessary payments.

The fact that you can access the finances tied up in unpaid invoices makes invoice factoring one of the most efficient ways of minimizing the harms associated with late payments. It can be the best option for you if you’re running a company facing seasonal deviations in its cashflows.