When Should You Use Invoice Factoring?

In the early days of any business – and throughout the period when it’s considered “small” – cash flow is very frequently a problem. If it is happening to you at the outset or in the early days of your business venture, then you can take heart that you are not alone. Cash flow problems are part of the monthly grind for small businesses, and this is precisely why invoice factoring exists. 

Thales Financial, a Salt Lake City invoice factoring service, say that invoice factoring services are, more often than not, needed by small businesses. Invoice factoring is a service whereby a factoring company will pay the value of an invoice the company has sent to a client. When the client pays the company, the company pays back the factoring service. 

Therefore, you can think of invoice factoring as a way of getting money sooner – and this is often essential to maintain a healthy cash flow. 

Cash flow is related to the money that is available to a business at a particular point in time. When everything is totted up, it might well be the case that a company makes sufficient profits in order to cover expenses, but if they money isn’t available as and when the expenses are due – i.e., if you’re ever waiting for the money to come in before you can pay a bill – then you have a cash flow problem. 

As mentioned, this is common enough among small companies and is one of the reasons why invoice factoring is often necessary for small businesses to survive. Nevertheless, this cannot go on indefinitely. Indeed, one sure sign of company growth is when invoice factoring is no longer needed. 

Furthermore, a company needs to know when this point has come. The first step to knowing this is learning the precise conditions under which it makes sense to enlist the services of factoring company – and when you shouldn’t.

Why Do Small Businesses Have Cash Flow Problems?

Before getting on to that though, it makes sense to know precisely why small companies need invoice factoring. The most basic answer is cash flow problems, but this doesn’t explain where the cash flow problems have come from. 

Sometimes a company might only be able to progress to the next stage of growth with a new investment, be that in order fulfilment marketing or whatever. This could be one of the reasons for a cash flow problem, even when total profits are sufficient to cover the costs. 

A small company might also experience sudden unexpected financial difficulties for which total profits are not sufficient to ensure a healthy cash flow. Normally, these buffer funds are not particularly significant, and so unexpected disaster is another reason why a small company might enlist the help of a factoring service. 

When To Use Factoring 

So, when should you use a factoring service? You actually don’t need to worry about being unable to pay it back because the loan from a factoring service is only granted with the presentation of an invoice as security. 

However, there should be an end in sight. Invoice factoring shouldn’t just indefinitely cover cash flow problems but should be a temporary measure to ensure cash flow for the time being. There needs to be prospects of improvement on the horizon (perhaps because of the investment which is causing the cash flow problems in the first place). 

So, while you should be incredibly careful and ensure that invoice factoring is only a temporary service, there is no denying that it’s often necessary among small businesses. Think of it as a lifeline to help you through the difficult early days.