An increasing number of businesses are turning to invoice – or accounts receivable – factoring to maintain a steady cash flow and grow their business. Just how does invoice factoring work? When you take a look at this alternative funding source through the following fictional example, you can get a good idea of how factoring could also benefit your business.
Tech Hub, a tech start-up, provides technical consulting services to a growing number of customers. Their two largest clients, DigiTech and GadgetCo, have negotiated credit terms with Tech Hub that allow them to pay their invoices one month after work is completed.
The problem is that with its rapid growth and new staff, Tech Hub can’t wait a month to get paid. They need to pay their overhead expenses and cover their growing payroll to continue expanding their business. Waiting for their two biggest clients to pay them has put Tech Hub under financial pressure.
They applied for a bank loan but found that this wouldn’t work well for their business for a number of reasons. Firstly, the approval process was very lengthy. Secondly, they don’t have an established credit history due to the fact that they are a new business. Thirdly, they didn’t want to add another line of debt to their business.
How Factoring can Benefit your Company
Tech Hub researched their financing options and determined that factoring their accounts receivable from DigiTech and GadgetCo made a lot of sense because it would provide them with the immediate cash flow that they needed to pay for expenses and grow their business. The factoring company gives them upfront cash for work delivered and once DigiTech and GadgetCo have paid, the outstanding amount minus a small factoring fee is paid to Tech Hub.
Tech Hub receives the benefit of the factoring company’s professional collection services, which means they don’t have to employ additional collection agents. The factoring company also checks the credit ratings and payment histories of potential new customers, which enables Tech Hub to make better financial decisions about the new clients that they take on.
If the above scenario sounds like something that could benefit your business, then partner with Interstate Capital for factoring services today.