It is expected that most businesses will face financial struggles within the first year. Thiscan be especially stressful if you are not an experienced entrepreneur. If you area contractor, financial pressure is especially stressful because it impacts your ability to take on other jobs. The case of a contractor not being paid means that materials cannot be purchased and you cannot grow your business.
At Nova, we understand that most small businesses are under a lot of financial pressure but it is also not normal to let this financial pressure affect how business decisions are made. So, if you are currently in this type of situation, there’s something you can do. You may think that borrowing money from banks and financial institutions is your only option but you can also sell your receivables. Selling your receivables is called invoice factoring and it is a well-known method to finance a business.
What is invoice factoring?
Invoice factoring is a factoring finance method wherein you will sell your accounts receivables to a third-party called the factor. Receivables are achieved when you sell your products and services to your customers. You exchange your goods for the amount they are going to pay in the future. Most of the time, vendors give terms to customers so they can enjoy discounts for paying the receivables early. However, not all customers can pay early even with discounts. There are times that you will have to wait for more than 30 days just to get their payments. As someone who is continuously running a business and trying to grow, this can affect your cash flow and your overall business decisions. This is one of the main reasons why companies are choosing to sell their accounts receivables in exchange for funds that they could have gotten from paying customers.
So, what are the benefits of invoice factoring financing?
First and foremost, it allows you to get the funds you need for your business. The main purpose of why you are selling your receivables is to get additional money to keep your business running. In regards to a contracting business, this means that they can purchase new materials and take on larger jobs and that the contractor is not waiting for the client to pay outstanding invoices to do so.
Additionally, if a contractor is paid consistently and on time, they are able to buy materials, take on new jobs, maintain a good reputation in the industry and grow the business organically. By using a factoring finance method, you’ll be able to get the amount you need in your hands.
Secondly, invoice financing reduces your hassle of asking your customers to pay. Invoice factoring is selling your accounts receivables to a factor. This means that you are transferring the responsibility of an AR owner. The factor becomes the owner of the receivables so he/she should be the one contacting your customers to pay. This saves a lot of time and stress that comes from communicating with customers.
Finally, invoice factoring will only cost you around 10-20% of the account receivable plus the factoring fee. If there are variances as to the amount collected, the money will be deposited back to you. Compared to the amount you are going to get, a 5-10% discount is not that big especially if you really need the funds for your business, you are able to take advantage of discounts and improve your reputation.