Invoice finance sometimes called debtor finance or just factoring,is a huge boon to small and medium sized businesses. They allow the business owner to leverage the assets of the firm in a productive way through receivable finance. In this way using the invoices of the business, the owner can gain access to small business working capital without much hassle and in time to meet the necessary expenses. For business owners who are not familiar with factoring, the immediate advantages may not be very apparent. In effect, there are three main advantages to when you opt for this kind of debtor finance.
- Cash availability: For a small or medium business that has to keep pace with competitors who are bigger and better established the key concern is liquidity. Often, bigger businesses or those that have been in the niche longer have capital reserves that allow them to adapt to market changes quickly or to increase inventory or production at short notice. With the lack of much capital hampering it, small businesses often fail to remain competitive in the marketplace. By taking advantage of invoice factoring, these businesses can bridge the gap.
- Outsourcing collection: Another important yet time and resource consuming task that often erodes a small business’ ability to stay agile in the marketplace is invoice collection This is often a very complex and long drawn process that needs the investment of much manpower. A small business may lack the ability to dedicate human resources to invoice collection but this impairs its ability to ensure that debtors pay on time. The small business cannot afford to allow invoices to remain unpaid because this impacts its working capital availability. This problem is addressed by factoring too because the factoring agent takes on the task of invoice collection. In effect, the small business owner outsources invoice collection to the factoring agent.
Debt avoidance: What is the option open to small businesses if they need cash to meet an emergency expense or if they lack funds to match their expansion plans or production increases? They have to look for lenders willing to make a loan to them. If the business is a new one, this may prove to a tough task. The loan, even if available, may be a very expensive one that results in a huge drain on the business’ finances on a recurring basis. With invoice factoring, this debt burden can be avoided completely because the asset being used is the business’ own invoice and cash is advanced against this asset so no repayment is required.