5 Signs Your Business Needs Factoring Services

Cash flow problems can plague businesses of all sizes and industries. In fact, Entrepreneur reports that around 82 percent of business failures result from poor cash management, according to a U.S. Bank study. If you need cash on hand but have issues collecting invoices in a timely manner, a factoring service might be right for you. It's an alternative type of lending that allows you to access money you're already owed without having to approach a bank or get caught up in other high-interest-rate options.

Here we'll dive into what factoring services are, how they work, and five key signs that indicate your business needs them.

What is a Factoring Service?

If you need cash up front and quickly, you can sell unpaid client invoices to a factoring service, who will pay cash for them and then collect what's owed on the invoice directly from the client on a later date. This essentially helps the business maintain a more predictable cash flow without having to worry about collecting overdue invoices from their clients.

How Do Factoring Services Work?

The process is actually fairly simple:

1. You issue an invoice to your customer with agreed-upon payment terms.
   
2. You sell that invoice to a factoring service, who in turn advances you around 70-90% of that invoice's value up front.
   
3. The customer pays the factoring service directly, rather than your company.
   
4. Once the customer's payment is received, the factoring service gives your company the remaining balance of that invoice, minus a small factoring fee.
   

The idea is to have quick and painless access to cash for immediate business expenses if your customers are late on their payments.

5 Signs That You Could Use Factoring Services

1. You Have Frequent Cash Flow Problems
Inconsistent cash flow can really dampen a business' growth and put a halt to operations if it is unable to cover short-term expenses. There are a number of industries that are often affected by this — seasonal employers, startups and growing businesses, manufacturing, staffing, and transportation just to name a few. But factoring services help turn unpaid invoices into working capital with short notice, thus ensuring you have the cash to maintain your operations and pay your employees.

2. Your Customers Procrastinate on Cutting Checks
​Slow-paying customers can have a domino effect on your business. Longer payment cycles can create financial stress, operating expenses pile up, vendor and supplier relationships become strained, etc. But a factoring service cuts through these issues by eliminating the Cash Gap waiting period and empowering your business to reinvest that money as needed.
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3. Meeting Payroll or Paying Vendors on Time is Difficult for You
The last thing your growing business needs is a negative reputation among employees, suppliers, and/or vendors. Being unable to pay your employees on time can cause massive disruptions in their lives and might wind up with them seeking other employment. Meanwhile, a vendor or supplier may decide to stop working with you altogether if you're unable to meet the financial terms of your agreement. The immediate cash that factoring services provide can negate these pitfalls entirely.

4. You're Growing Quickly
We all want to grow our companies, but there is such a thing as growing too fast. When this happens, cash flow becomes a significant issue because increased demand leads to higher upfront expenses for inventory, payroll, and ramping up operations. On top of that, if you're waiting for payments from clients to come through, you may find yourself stuck between a rock and a hard place. You may find yourself waiting months on end for payments to come through — months that may dry up the cash you have on hand. In the meantime, a factoring service can help you get cash on hand quickly so that you can keep up with demand and afford to pay your workers. It can also allow you to scale confidently so you can expand into a new market or take on new clients without liquidating any assets.

5. Traditional Lenders Deny You
Oftentimes banks are hesitant to lend money to companies if they lack credit history, financial stability, or otherwise don't meet lending requirements. This is especially true for startup companies who are trying to make a name for themselves. Having the capital to cover immediate costs is imperative for long-term growth and success. A factoring service eliminates the need for a solid credit history; instead, the creditworthiness of your customers is paramount.

Prairie Business Credit is a Factor For You
If your business has cash flow problems, slow-paying customers, difficulty meeting payroll, quick growth, or trouble with banks, Prairie Business Credit is here for you. We are a private, family-run company invested in your success. Since 1993, we've helped 70% of our client base progress to bank or self-financing through factoring or purchase-order financing.
To learn more about how we can help you today, get in touch!