Invoice Factoring: The Critical Success Factor in your Business

– By Tracy Hawkey, Managing Partner, The Only Choice, LLC

Did you know that 69% of small business owners say they have been kept up at night by ongoing concerns about their cash flow status?

Most entrepreneurs are unaware of this efficient and effective means of powering their businesses- both for financing growth and accelerating their cash flow.

Introduction by David Wagstaff, Founder and Chief Dream Maker at Eprenz.com

Week after week, I mentor scores of entrepreneurs, helping them live their business dreams. Their topmost concerns are “How do I grow my business?” and “How to finance it?”. The following article addresses a powerful, efficient, and effective way for businesses to free up their cash flow to invest in growth.

Free up your cash flow for what matters the most!

Start-ups sure, are exciting, but they also come with a plethora of challenges and require critical decision-making. One of the key decisions you have to take is how to raise capital to finance and operate your company. Sans a pedigree studded with success and profitability, and having a short credit history, it can be arduous to qualify for loans and raise the needed funds. Most banks normatively require a minimum of two years of business history, so most start-ups fail to procure traditional financing from banks. Even for established businesses, banks prefer to lend for buildings or equipment purchases (so-called solid assets!). Assuming you can secure a loan, the mandatory monthly EMIs add to the burden of having enough working capital to defray your monthly expenses.

Growth in business is not a bed of roses but are accompanied by many pitfalls. Business growth brings with it growth in your working capital needs, bad paymasters with long payment lags, bad debts, untimely liabilities, credit issues, increased inventory demand, and competitive pressures that further strain your cash flow.
Options for meeting this ever-increasing appetite for working capital include term loans, lines of credit, finding a business partner, or an Angel investor. However, in business there are no free lunches- these options cost money, or equity, thereby reducing your ownership percentage, and consequently adding pressure on business profitability.

Almost all industries, especially B2Bs, are faced with cash flow challenges. Intuit QuickBooks released a global study in late 2019, the “State of Small Business Cash Flow,” which revealed that 69% of small business owners are kept up at night with concerns about cash flow. However, for most small business owners and self-employed workers who struggle with cash flow, the problem is not an absolute paucity of funds in the pipeline – it’s just that they don’t have timely, ready access to funds for real-time expenses.

So, how do to conjure up adequate, timely working capital without increasing the debt burden, or having to dilute equity, and giving up control over business decisions?
The answer lies in two magic words- Invoice Factoring.

What is Invoice Factoring? Simply, it is a means of unlocking funds blocked in your accounts receivable immediately, instead of having to wait up to 60, 90, or even 120 days for your customers to pay their invoices. Essentially, you send the unpaid invoice/s to a factoring company, which pays you the bulk of the invoice amount (around 80-90%) immediately. Then, once the customer settles the invoice to the factoring company, they pay you the remainder of the invoice, minus their fee.

This is not to be confused with Invoice Financing, wherein the lender or discounting company will lend you a portion of the value of your accounts receivable (again, around 80-90%) in the form of a line of credit or loan. Then, when the client finally pays you the invoice/s value, you repay the lender for the amount that they loaned you, plus fees and interest. With invoice financing, your company retains the onus of collecting the unpaid invoice from your customers, which is what makes the former (Factoring) a superior, more hassle-free method.

Invoice factoring works for pretty much any B2B company in almost any industry and is an excellent tool to help established, as well new businesses in overcoming similar cash flow challenges. If you have a burgeoning business where you need to expand staff, extend credit to additional customers, increase your net terms to be more competitive, and are contemplating added expenses of moving into a larger, more expensive location.

Why this Invoice Factoring the optimal solution?

Factoring your invoices is NOT taking on additional debt/loan that needs to be repaid- there are NO APR fees. Alternately, if you open a line of credit with a bank, you will again take on additional debt. You will momentarily solve your working capital and cash flow issues, but at a considerable monthly cost and bear the interest servicing burden for a long duration!

The problem is further compounded if you pick up some new accounts and have to fulfill big-ticket orders. Will you then request the bank for enhanced credit and wait for approval? Instead, if you take the invoice factoring route rather than a bank line of credit, all that is needed is to sell more invoices to raise the required additional capital. Smart entrepreneurs leverage invoice financing companies to fund aging invoices, thereby getting immediate cash at low rates, without a bank loan to repay.

How does Invoice Factoring Work?

Factoring refers to an arrangement whereby “a factor” purchases an account(s) receivable from a business discounted to the face value of that receivable. The factor earns a fee based on the number of days that the receivable remains unpaid, i.e., the longer the period, the larger the fee.

Effectively, your business is liberated from the onerous collection task, which takes typically, 30-90-days. Thus, businesses benefit from the acceleration of the cash flow and being able to deploy the surplus time and energy in more productive pursuits.

Today, the most common form of factoring is nestling in your wallet – the ubiquitous credit card! Each time a merchant accepts a credit card, he/she is giving up a portion of the total sale to the card issuer (typically a bank) who in turn, eventually collects from the consumer.

✔️ Complete a short application, approval typically takes 3-5 days. While not all factoring companies work in the same manner, once you have applied to my company, TOC Funds assigns a senior factoring team member to your account who will walk you through all the necessary formalities.

✔️ Once approved, you simply continue to pursue your normal course of business.

✔️ When issuing invoices for products/services, submit copies of your new outstanding invoices and any required supporting documentation to TOC Funds, through our lending partner’s portal.

✔️ The factor (TOC Funds) verifies the work/delivery and then forwards you the money, usually 80%, but can increase to 95% of the total invoice amount within 24 hours of verification.

✔️ Once your customers pay the outstanding invoice amount to us, you’ll receive whatever balance remains, minus our factoring fee.

Benefits of Invoice Factoring for Business Owners

Factoring has several advantages over other types of small business financing with the obvious benefit being that it can improve your cash flow quickly. Also, Invoice factoring can be deployed swiftly, and the financing line is indexed to your company’s sales, so it can grow in sync with your revenues.

Improved Cash Flow and Working Capital – By eliminating the collection time lag, invoice factoring provides immediate cash to fuel your business’s growth imperatives.

Capitalize on Opportunities – With cash flow linked to your sales (invoices), you can take advantage of growth opportunities including new sales and marketing initiatives, purchasing equipment for expansion, securing new accounts, and building additional inventory.

An alternative to Loans or Borrowing – Many lenders avoid small and medium-sized businesses, especially young companies, labeling them as credit risks. Factoring offers you the working capital your business needs, while other forms of financing simply shackle your potential.

Reduced Operating Expenses – By using the cash released from accounts receivable financing to qualify for bulk/cash discounts from your suppliers and eliminating the overheads of the collection process.

Improved or Strengthened Credit – With additional cash in hand, you can quickly pay your bills (and leverage your suppliers’ payment discounts), fund payroll, and pay taxes.

Stronger Balance Sheet – Since factoring is not a loan; it doesn’t appear on your balance sheet as an expense. Thus, you get the benefit of a loan without the traditional downside.

Hence, factoring can be a great alternative financing strategy for entrepreneurial companies that are growing exponentially, but encountering cash flow issues.

Do you qualify?

Qualifying for invoice factoring is relatively easy since it is available to all small businesses and self-employed individuals following the B2B model and fulfilling these criteria:

  • Have commercial clients who pay in less than 60 days
  • Have unencumbered invoices
  • Are free of major tax or legal issues

In a nutshell, if you are conducting business with other businesses, then you are eligible to sell your accounts receivable to an invoice factoring company. The invoice factoring industry focuses on the underlying strength of your invoices, rather than your duration in business. In this instance, ‘size does NOT matter- whether you are a large company or a start-up. If you have good quality invoices, you’re a great candidate to factor aging receivables.

So, what’s keeping you? Start factoring in the critical success factor in your business- INVOICE FACTORING- and laugh all the way to your bank!

Tracy Hawkey

Tracy Hawkey

Managing Partner, The Only Choice, LLC

Tracy is the Managing Partner of ‘The Only Choice’, a growth-oriented small- business leader in the technology and manufacturing verticals. They are service providers delivering strategic sales solutions, performance coaching, and new logo development. The firm has a successful history of building and rebuilding sales teams while exceeding assigned goals, especially when confronted with complex business problems, utilizing modern business tactics and innovative cross-functional and customer-centric teams.

To learn more or to apply, please visit the TOCL website and complete the pre-qualification application. Undecided? Have Questions? Speak to a Factoring Coach

Email : tracy@tocfunds.com
Phone: (303) 219-9585.