How to Use Invoice Factoring to Improve Your Business Cash Flow
Cash flow can be difficult for a business to manage effectively. When you wait 30, 60 or 90 days for payment of work already completed, expenses don’t wait with you. They need to be paid now.
But you aren’t at liberty to change payment terms you agreed to with customers. If you try it, they’ll just leave you to find another company that will work with their terms.
Let’s look at a cash flow example. Say you own a small trucking business with a fleet of 5 trucks. The trucks are assigned as collateral to the company that financed them.
Business is good. You have experienced drivers and your trucks haul for great customers who pay well. But paying well does not mean paying quickly.
Yet you have truck payments, fuel, maintenance, insurance, taxes, payroll, and other overhead. You find yourself burning through cash before you get more.
You don’t want to lose your drivers or your trucks. And you’d hate to lose your customers to competitors. But debt is not an option; the trucks are already financed. If only you could get paid quicker.
Then you hear about invoice factoring and how it can smooth out cash flow. You decide to give it a try.
How Does Invoice Factoring Work?
Invoice factoring is not a new concept. It’s been around for centuries. It is selling accounts receivable to get cash for your business.
In the example of the trucking company above, when a load is delivered and the customer is billed it creates an account receivable. But the customer doesn’t pay until the agreed upon terms. That long wait time puts stress on the business.
With invoice factoring, instead of billing the customer, you sell the invoice to a factoring company. The factor then pays you an advance of up to 98% of the invoice value.
The advance you receive depends on the agreement reached between you and the factoring company. That advance is paid to you within 24 hours or less.
The factor bills the customer and waits for payment. Once your customer pays the factor, the remainder is paid to you minus a small fee for factoring.
Instead of waiting long times for payment, your business receives cash immediately after transmitting each invoice. Now the trucking company has the consistent cash flow to carry on hauling freight. As long as you deliver loads, you’ll have the cash right away.
And the factoring company takes on the billing and collections. No more trying to manage accounts receivable and no more spending time trying to collect on them. The factor does it all for you.
How Invoice Factoring Can Help Grow Your Business
Now that the trucking company has improved business cash flow it’s time to focus on growth. Meeting all your expenses on time, having extra money on hand, and saving time and money on accounting services frees you up to take on more work. Here’s 20 easy ways trucking companies can increase their profit margins.
Your customers are happier than ever that you’re so dependable, always delivering on time now. They offer you additional loads. Instead of turning them down for lack of cash to operate, you jump at the opportunity.
You begin to add more trucks, more drivers and more trips. And your business is thriving, all because you improved your cash flow by invoice factoring.
And the more your business cash flow grows, the more your factoring grows with it.
Is it Hard to Qualify for Invoice Factoring?
No, not at all. You don’t need a high credit score. In fact, it doesn’t matter if you have bad credit. With factoring you’re not borrowing so your credit is not important.
It’s the credit worthiness of your customers that matters. As long as your customers have good credit and a strong history of paying you will most likely qualify.
That’s why invoice factoring is a great idea for those new to the business and/or having a low credit score. Factoring is getting paid on work you’ve already done. It’s your money; you earned it. You just get it without having to wait. The factor does the waiting for you.
Invoice factoring is also good for businesses that are thriving but experiencing interruptions in cash flow. Getting paid immediately on invoices can really improve business cash flow and reduce the stress caused by long payment wait times.
If you’d like to improve business cash flow, reduce accounting costs and grow your business, you owe it to yourself to look at invoice factoring. It’s used by all sorts of businesses, not just trucking.
Rachel Donaghy is the Senior Director of Account Management at eCapital.com. eCapital is building a brighter future for the transportation industry. It’s a future where freight companies get paid at the click of a button. Where document exchange becomes data exchange. Where complexity disappears into the background and drivers have the freedom to focus on delivering the next load. You can find Rachel on LinkedIn and Twitter.