Business owners that don’t know a great deal about invoice factoring may be under the impression that invoice factoring is expensive and unaffordable. But nothing could be farther from the truth. In fact, not understanding exactly how invoice factoring can be used as a method for generating working capital is often a costly mistake that many business owners make.
Factoring accounts receivable invoices is one of the quickest and fastest methods of obtaining the working capital a business needs to operate efficiently and without having to take on a loan. Because accounts receivable factoring does not involve taking on any type of debt, this method of raising cash for your business does not require the risk associated with a bank loan or a line of credit that can be restrictive and limited. And the cost? In most cases, the cost to factor invoices is no more than the normal fee that credit card companies such as MasterCard and Visa charge merchants for each credit card sale.
Can You Afford to NOT Factor Your Invoices?
Instead of wondering whether invoice factoring might be expensive, look at it this way: What are you alternatives? If your business needs working capital, you are going to have to raise cash somehow. If your business qualifies for a bank loan, you have the option of going that route. However, you will not only be required to repay the loan and also pay interest on the loan, but you will also be burdened with significant debt that must be listed on your balance sheet and often restrictive covenants. Additionally, bank loans have limits. What if you end up needing more?
While it might be true that the interest rate a bank charges for a business loan may be slightly lower than the transaction fees associated with factored invoices, there are pros and cons to consider. As stated above, bank loans require a business to assume a certain level of risk. Loans require collateral. Are you willing to take the chances associated with a large loan from a bank? Additionally, when a business takes on massive amounts of debt in order to stay afloat, it can limit the business’s ability to move forward and pursue promising business opportunities.
Why Does Invoice Factoring Make Perfect Sense?
When you choose accounts receivable factoring, you are opting for a positive cash flow mechanism that is quick, efficient and reasonable. Additionally, invoice factoring allows your business to raise working capital without the need to take on debt. The flexibility associated with invoice factoring does not exist with most other cash-generating methods. When a business decides to work with an invoice factoring company, invoices are sold, and working capital becomes immediately available. This quick access to money eliminates the need for a business to wait 30, 60 or 90 days for its customers to pay their outstanding invoices. For a business in need of working capital to keep operations functioning normally, the low transaction fees associated with invoice factoring are well worth the benefit of an immediate influx of cash.
Accounts Receivable Factoring is a Financial Tool that Can be Used to a Business’s Advantage
There is a skewed perception that only failing businesses utilize invoice factoring as a last resort to generate cash to stay open. This is simply not the case. In fact, some of the world’s most successful businesses regularly and systematically utilize invoice factoring as a simple and quick method of raising funds that are used to pay for operational expenses and new business ventures.
The bottom line is this: Invoice factoring is not expensive – especially when you compare the transaction fees with the cost of waiting three months for a large outstanding invoice to be paid. Additionally, any business that is having trouble making payroll, paying operational expenses, or turning away new business due to inadequate working capital might be at risk of going out of business. Invoice factoring can solve these problems at a minimal cost. So, the answer to the question, “Is Invoice Factoring Affordable” is Yes! Accounts receivable invoice factoring allows a business to spend time and effort developing and growing instead of countless hours trying to collect money from customers. Invoice factoring is affordable, and is often the best possible financing alternative for businesses in need of immediate working capital.
Editor’s Note: Greg Curtiss is President of The Invoice Bankers. Mr. Curtiss previously was a lawyer and has passed the CPA exam. He has been in business for over 25 years. You can reach him by calling 303-740-7600 or 1-888-740-1750.