During the early stages of your startup, you need to focus on building your customer base. Important growth techniques, such as smart product development and targeted marketing, require money.
Capital reserves are hard to come by when you are just starting out. Freeing up funds you have in outstanding invoices can help you move your business forward.
What is Accounts Receivable Financing?
Accounts receivable financing can take many different forms, but the most common is factoring. Factoring is a way to turn your outstanding customer invoices into working capital.
Partnering with a factoring firm allows you to receive the majority of the amount owed on an invoice, typically 75 to 80 percent. The factor then takes over the process of collecting the owed payment from the customer.
You do not have to wait for late payments to get your cash flow moving to operate and grow your business. Although you lose a minimal amount of profit through factoring, you also get the money you need right away without spending time trying to collect.
Benefits to Your Cash Flow
Having more available cash allows you to focus on building your business. As an entrepreneur starting out, it may be difficult to get financing through your bank or even to bring on new investors before you’ve proven your concept.
Driving sales requires advertising, attending trade shows and investing in inventory, which all require capital on hand. While it’s true you will take in slightly less revenue through factoring than if you’d waited for your customers to pay, you also free up time you’d spend on chasing on payments.
Keeping Up Strong Customer Relations
Factoring your invoices means you can turn your attention to making your customers happy. There’s no need to do double duty as both a collection officer or accountant and a small business owner.
In essence, you keep the payment aspect of the business-customer relationship at arms’ length. The result is an improved reputation as an entrepreneur, which can help you gain those all-important customer referrals as you’re trying to earn to bring in new revenue.
Accounts receivable financing does not come without risks. The older the invoices you factor, the smaller the percentage you may receive.
However, when you are considering all of your options to improve your cash flow, it’s important to remember that you stay in control of your business with factoring. You’re not subject to the whims of an outside investor, so you can focus on growing your enterprise.