Small companies need reliable credit at least as much as their larger competitors, but often they face restricted access to business loans and other long-term financial instruments. Even when that is not the case, those products are aimed at large purchases and long payment horizons under most circumstances, so companies also need credit options for short-term cash demands and opportunities. That is where options like invoice factoring are the most effective, and using your invoices can be the best way to approach the issue if you do it correctly.
Service Fees vs. Financing Charges
When you sell your invoices to a third party, you are selling the risk and the work that goes with collection, and that is why you take less than the face value for them. Basically, the service charge is the gap between what the provider collects and what you receive, and that allows you to reconcile complete payments on your books.
Many small companies find ways to fold factoring services into quotes, but that is a more complex discussion. The important comparison is between financing charges like interest, which vary depending on how quickly you repay a debt, and the service charge paid to a factor, which is static as a percentage of the invoice pool’s value. The increased predictability and the fact there is no debt to maintenance are both great advantages that also limit costs.
Set a Pattern To Sending Out Invoices
The most effective way to manage a company’s finances with this kind of service tends to be regular patterns of use. Service providers prefer newer invoices with a good chance of being paid quickly, so if you submit them every month, you will never submit one older than thirty days. That also gives you regular monthly pay dates, and the invoices that are paid before factoring provide you with additional profits you did not predict.
Building your own costs and margin calculations around the combination of costs and benefits you get with regular submissions of your invoices is the key to making the most of the situation. Under the right circumstances, you can send out a lot of administrative work and then use those productive hours on projects or marketing for growth. This is especially beneficial for small companies with few employees to spare and for freelance operators who do not have full-time support staff. Keep that in mind as you plan your financial strategy around factoring.