One of the toughest jobs of running a small or mid-sized company is juggling expenses and revenues. As an owner or manager, you need to make sure that there are sufficient funds to cover expenses. At the same time, you have to deal with clients who typically pay invoices in 30 to 60 days.
Since revenues and expenses often occur at different rates and times, they are difficult to match. For most small companies, expenses happen quickly. And revenues, coming in slowly, seldom synchronize with their corresponding expenses. This mismatch is a common source of cash flow problems.
There are two ways to solve this problem. You can build a reserve and use it to run your business while waiting for payment, or you can accelerate your revenues.
Option #1: Create a cash reserve
One way to deal with financial problems created by slow-paying clients is to build a cash reserve. This strategy is effective and helps you if you ever run into a cash flow shortage. However, many business owners don’t have the resources to build a reserve account. And those that do have the resources often feel uncomfortable having substantial assets just sitting in an account. They prefer to deploy those funds to grow the company.
You should always have a reserve account – it’s the smart thing to do. However, if your reserve account is small and you are experiencing cash flow problems, consider using a small business financing solution such as factoring.
Option #2: Accelerate revenues with invoice factoring
If your company has slow revenues because clients are paying in 30 to 60 days, you can improve your cash flow by factoring invoices. Invoice factoring accelerates revenues from slow-paying clients and provides your company with funds to pay business expenses. Factoring provides many of the benefits that you would get if your clients paid quickly without actually requiring them to pay sooner.
This solution accelerates your revenues by working with a factoring company to finance your invoices, providing you with quick funding while the factor holds the invoice until payment.
Invoice factoring has a number of advantages over conventional financing. The solution is easier to get than a business loan or line of credit, since factors don’t have the same qualification requirements. It can also be a source of quick financing, since most lines can be deployed in two weeks or less. But, more importantly, the program allows you to offer payment terms to your clients while reducing the effects of slow payments on your cash flow.
When used strategically, invoice factoring can accelerate your revenues and enable you to take on new clients. These benefits make factoring an effective tool to finance the growth of your company.
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