There are nearly 28 million small businesses in the U.S., and in today’s uncertain economic climate, many small businesses struggle to stay afloat as a result of insufficient funds. In fact, according to a U.S. Bank study, 82 percent of businesses that fail do so because of cash flow problems.
For many small businesses, however, invoice factoring can be a viable solution to their cash flow issues. Invoice factoring is a type of accounts receivable financing that converts outstanding invoices into immediate cash for your small business. Before choosing the right invoice factoring service for your business, it’s important to understand the facts. It’s also important to clear up the potential misconceptions about invoice factoring. Here are just a few invoice factoring myths you shouldn’t believe.
Myth 1: Business factoring services are expensive.
The most common misconception about invoice factoring services is – no surprise – related to the cost. Most charge a small percentage of the invoice total to provide your business with the immediate cash flow it needs to help meet your day-to-day expenses.
The reality is that no business can survive for long without a consistent stream of income.
Recent research suggests that nearly 60 percent of all invoices are paid late. Invoice factoring ensures that you’re not waiting for your money or wasting your time chasing down slow-paying clients.
Invoice factoring companies also provide additional services as part of your fee. These services – invoice creation and submission, collections, credit checks on your future clients — can be invaluable resources to busy small business owners who are wearing too many hats. Invoice factoring companies provide a team of back office professionals that keep your paperwork in check and make sure that you’re getting funded on the work you’ve completed.
When considering working capital solutions for your business’s cash flow issues, it’s important to keep in mind the additional benefits included in the factoring services and calculate the overall benefit to your business. Outsourcing your invoicing and collections processes can lead to savings in time and money, allowing you to dedicate more resources to growing your business.
Of course, the exact fee and costs associated with factoring depends on your specific business situation.
Myth 2: My customers will look negatively upon invoice factoring.
Some people think that businesses using invoice factoring might be having financial issues or may not be seen as dependable vendors. More than that, some business owners worry that a third party provider contacting your clients to follow up on payment may be seen as more of a collections service rather than an extension of your accounts receivable department.
But the reality is that thousands and thousands of businesses use this form of accounts receivable financing for their small business funding. Increasingly, invoice factoring is becoming more common across industries, as companies look to streamline their account receivables process.
Some providers can even provide a white label service in order to make it appear as though invoices are sent to and from your business instead of a third party.
Myth 3: Invoice factoring companies won’t work with businesses that aren’t ‘established.’
Whether you just started a company, or you’ve been in business for a long time, if you have an invoice, you can take advantage of business factoring services.
The reality is that most startups don’t have enough credit to qualify for traditional loans and financing. Conversely, invoice factoring looks at the credit history of your clients when deciding to purchase your outstanding invoices.
Finally, it’s important to note that all types of small- and medium-sized businesses can take advantage of invoice factoring services. Also, invoice factoring companies consider a wide range of criteria when reviewing your application and accounts receivables.
The best way to know if factoring is a great short- or long-term fit for your business is to be as straightforward and direct about your financial history and situation as possible.
Myth 4: All invoice factoring companies are the same.
It’s easy to assume that all invoice factoring companies offer the same services, charge the same rates and have the same contract terms. But in selecting a factoring company, it’s important to remember that there can be significant differences among providers.
For instance, depending on your agreement, many factoring companies require you to submit all of your invoices for funding and maintain monthly minimums (or be charged a fee). Not all factoring companies have these policies, so it’s important to ask and to read and then reread your contract to understand what you’re agreeing to and for how long.
Ultimately, it’s important to understand the facts about the services provided by an invoice factoring provider and the services that they provide before you decide on a working capital solution. If you’re ready to move forward or have questions about invoice factoring, contact Triumph Business Capital today for a free rate quote.