Marco Terry

Handling a Payroll Emergency With Invoice Factoring

If your company at risk of missing payroll? Read this article to help you and your financial adviser determine if invoice factoring is the right solution for your business.

One of the consequences of the recent recession is that companies have become more guarded and conservative with their cash flow. For example, many large companies are conserving cash by paying their invoices more slowly. In turn, this has affected smaller companies who depend on steady predictable cash flow to be able to meet their obligations. Likewise, smaller companies are also doing the same thing and trying to pay their invoices slowly as well. Ultimately, everyone's cash flow is being affected.

The problem with this is that many small companies live invoice-to-invoice (not unlike paycheck-to-paycheck) and a delay in invoice payments can easily send their finances into a tail spin. And since few small companies have any meaningful cash reserves, a delay may impact their ability to pay suppliers - and more importantly - their ability to meet payroll. Missing payroll can have substantial negative consequences that could ultimately lead to the closure of the business.

Your first line of defense to prevent a cash flow shortage is to build a cash reserve. This is easier said than done since most small businesses don't have the wherewithal to build a cash reserves. But if you can build a cash reserve, your company will be in a better position to weather the inevitable storms that will hit your cash flow. If building a cash reserve is not an option, then you should consider using a business financing solution that can allow you to cover payroll and other expenses if things get tight.

Invoice factoring is a business financing solution that can be used to correct cash flow issues relatively quickly and without the hassles associated with conventional financing. It works by correcting the problem at the source. It provides you a cash advance for your slow paying invoices, providing the liquidity you need to meet payroll and other important expenses. With an invoice factoring solution you can eliminate the uncertainty of client payments, enabling you to obtain a more predictable cash flow.

One of the advantages of factoring is that the most important thing you need to qualify for this type of financing is solid commercial customers. It's ok if your customers pay slowly - provided that they pay reliably. Aside from this, your company needs to be free of legal and tax issues. And factoring can be deployed fairly quickly - usually in a week or two.

Another advantage of factoring is that it's dynamically tied into your sales. This means that it can be increased easily as your sales increase, provided that you are invoicing credit worthy customers. This makes invoice factoring the perfect solution for small companies with good prospects that are hindered by cash flow problems.

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