Manage and Improve Your Business With Invoice Factoring was written for Playlouder by a contributing author. Please note that contributing opinions are that of the author. They are not always in strict alignment with my own opinions. –Joe.
Growing and developing your business will increase your turnover and profit. But you can’t push your business in the right direction and earn more money when you’re wasting time chasing unpaid invoices.
A recent Quickbooks survey revealed that 65% of mid-sized businesses spent 14 hours per week on average to tackle the administrative tasks related to customer payment collection.
Furthermore, these businesses reported that they were owed $300,000 on average in late payments!
One solution to free up your time, reduce stress, and minimize overdue invoices is to use is invoice factoring, also known as debt factoring.
So, what exactly is invoice factoring, and how will it help you develop and grow your business? Let’s break it down.
Understanding Invoice Factoring
Invoice factoring is when you sell your business’s unpaid invoices to a third-party company, known as a factoring company, for a fee. Typically, you’ll make between 80% and 90% of the invoice’s value when you sell them.
When the factoring company successfully receives payment from the debtor, the remaining balance is paid to your business, minus the factoring company’s fees, which are usually between 1% and 5%.
This is ideal for businesses with slow-paying clients or, as you’re about to see, those who want to grow their business and reduce stress.
The Difference Between Invoice Factoring and Invoice Financing
You may have come across the term “invoice financing,” and it can be easily confused with “invoice factoring.” Both of these options utilize unpaid invoices but in different ways.
Invoice factoring, as we discussed, relates to selling unpaid invoices to a factoring company. Then that company works directly with your clients to retrieve payments and reduce your company's workload.
Invoice financing, on the other hand, uses the collateral of unpaid invoices to get a loan approved from a lender. The lender will advance you up to 90%. You pay them back, plus interest, after your client eventually pays you.
While both options may increase cash flow, invoice financing does not relieve the stress and manpower wasted to collect late payments.
Improved cash flow
Debt factoring instantly improves your business’s cash flow. Industry analysis shows that 56% of invoices were paid late in Europe and 43% of the total value of invoices across the Americas were affected by late payment since the start of the pandemic, according to Science Direct.
This unpredictability is tough on businesses as it makes it difficult to know when you can afford to start a new marketing campaign or launch a new product.
Furthermore, as Conor Campbell from NerdWallet describes, “Overdue invoices can have substantial effects on SMEs, causing them to make cutbacks on expenditure, recruitment, and even staffing.”
Utilizing a factoring company can solve all of these problems.
First and foremost, factoring companies take on the burden of chasing down invoices. This increases the likelihood that invoices will be paid in a more timely manner.
Secondly, by having guaranteed cash coming into your organization, you’ll be able to expand your business. This may include investing in new projects, purchasing new inventory, and hiring more members or staff.
New employees are particularly costly at between $4,000 and $20,000 per person, excluding their salary, but they’re worth it as they can drive your business forward.
Banish your stress
Half of all business owners say that they’re stressed and it’s impacting their business. There’s nothing more stressful than seeing a pile of unpaid invoices mounting up and being ignored by the same debtor over and over again.
Debt factoring can take all this stress away as the factoring company will do the chasing for you. When you hand your unpaid invoices over, you’ll instantly reduce your administrative burden which will free up your time and let you focus on driving your business forward.
You can also rest assured that the invoices will eventually be paid since debt factoring companies are experts in managing debt and collecting payments. This means you won’t have to worry about employing any more tactics to try to get people to pay.
Less financial stress
Financial stress is a big issue for everyone right now. Inflation, rising interest rates, and lack of savings all contribute.
“Half of global employees are anxious about their personal finances, as well as the state of their country's economy,” says Nudge's 2023 global financial well-being report.
The American Psychological Association concluded that the American economy is deprived of more than $500 billion each year because of workplace stress. Furthermore, they estimated that 550 million workdays are lost due to stress on the job.
In other words, the impact stress is having on employee productivity is directly affecting the finances of the companies they work for. Adding more financial stress to your business in the form of unpaid invoices is not going to help it grow, which is why you should consider debt factoring.
Business development tactics cost different amounts depending on what you plan on doing. A marketing campaign, for example, costs less than a new hire does at between $4,000 and $7,000 per month, according to Web FX.
When you use a debt factoring company, you can pick and choose which invoices you send their way, letting you manage your income effectively based on your business’s needs. This makes it a flexible income stream as you can give them more outstanding invoices when you have bigger growth tactics coming up.
By working in this way, you can also avoid paying some of the factoring company’s fees during periods when you don’t need such a large income.
Avoid taking out loans
Yahoo! reports that 58% of small businesses needed financing in 2022. Traditionally, businesses will take out a loan when they need finance.
The most common reasons for taking out a business loan are to increase cash flow (52%), buy assets (35%), and invest in inventory (25%).
Corinne Pohlmann, the Executive Vice-President of the Canadian Federation of Independent Business says, “It's crucial for small businesses to be able to access financing. Without it, many can't invest, innovate, or grow their business. And at a critical time like this, when costs are high on all fronts, some businesses need financing to simply maintain cash flow and stay open.”
Of course, this doesn’t mean you have to take out a business loan that comes with interest rates and repayment terms which, if they aren't met, could stop your business from growing.
By using debt factoring instead, you can ensure you get instant access to the money you’re entitled to. There’s no approval process to go through, so there’s no need to worry about whether the request will be accepted or rejected.
Plus, the only fees your business will have to pay are the factoring company’s fees which are typically a lot lower than the average interest on a small business loan.
According to Forbes, a business loan from a bank or credit union can have interest rates that are as high as 11%.
Fewer uncollectible debts
As already discussed, late payments are a big issue for businesses trying to grow. But, did you know that businesses typically write off many of their invoices as uncollectible?
“Our survey reveals that 13% of invoice payments to these organizations (small and medium businesses) in the United States are paid late, and a proportion of those invoices – 10% – are written off as bad debt. With most respondents citing not wanting to chase payments to protect the client relationship,” says Nancy Harris, Executive Vice President and Managing Director of Sage North America.
By passing the baton to a factoring agency to deal with the debt, you won’t have to directly deal with your client. It also shows your client that you’re serious and won’t be taken advantage of.
Not only does this mean the factoring agency is more likely to get the money from your client, but they’re unlikely to avoid paying you again, as they won’t want the factoring agency on their backs.
Frees up your time
Intuit QuickBooks reports that small businesses waste 56.4 million hours every year chasing down unpaid invoices. It’s not just your time that invoice chasing takes up, but your money too. After all, you’ll have to pay your employees for all the time spent trying to get your clients to pay you!
This can be detrimental to the growth of your business as it means you and your employees can’t work on strategies, products, and marketing that will move your business forward. A debt factoring company will give you hours of your time back so that you and your team can focus on the things that matter.
When you have a guaranteed flow of cash coming into your business via a factoring agency, you can provide better service to your valued customers. For example, you could offer more favorable repayment terms, such as the option of paying within 30 days instead of immediately after delivery.
This is a good way to grow your business and bring more clients to your door. Many companies will prefer your repayment terms compared to the terms other organizations offer and so will choose to do business with you rather than them.
You’ll find this is particularly crucial in the business-to-business (B2B) world as there’s a lack of flexible payment options for them compared to other industries.
No business wants to be stuck in a stalemate, but this can happen when you have a shed load of unpaid invoices. If this is the position you’ve found your business in, debt factoring could help you as you’ll receive instant money in return for handing over your invoices.
In turn, you can alleviate stress for your employees, and create a more positive and productive work environment.