How to use Invoice Factoring to Improve your Cash Flow

Managing a company's cash flow is one of the most important functions of a business owner during tough economic times. If done correctly, it will ensure that the business is there to thrive another day. If done incorrectly, it will jeopardize the business.

From a cash flow perspective, cash moves in only two directions. It moves in, when you make money. It moves out, when you pay expenses. Keeping this flow in balance is one of the toughest jobs in any business.

This problem is even more complex for companies that sell to other businesses or to the federal government. Large business clients usually expect to be given terms - which means that they will pay their invoices in 30 to 60 days. But as a business owner, you are usually presented with expenses that must be paid regularly. There is rent. There is payroll. And then, there are suppliers. All of which demand payment now. This difference in the timing of the flow of "cash in" and "cash out" usually creates a problem for business owners. If the business has ample cash reserves, the solution is simple. Pay the expenses now and replenish the reserves once a client pays. But what if you own a small business - or a growing business - and have no reserve? Then you must get business financing to cover the gap.

Most people think that obtaining business financing is difficult and requires a complex application process. While this is true for certain business loans, it is not true for all financial products. As a matter of fact, factoring, a product that is designed to deal specifically with cash flow problems, is fairly easy to get.

Factoring provides a simple solution. You sell your invoice to a factoring company, who advances you money for it. This reduces the time you take to get paid. The transaction is settled once your client pays the invoice in full. It's a fairly simple concept.

As a matter of fact, you are selling the invoice to the factoring company, so usually factoring is not considered a business loan. Because of this, factoring is relatively easy to get, provided your company does not have any liens or judgments and provided your clients have good commercial credit.
Factoring financing is a little know solution that can help a company improve its cash flow and when used correctly, it can position the company for growth.