Any business owner will tell you how difficult things can get once your small business starts to really pick up. Suddenly, there’s a demand that you might not be entirely prepared for. Perhaps you don’t have enough stock to keep the customers happy, or not enough manpower to alleviate the situation. In fact, you could do everything perfectly, and still get caught when you eventually need to expand and evolve in order to accommodate the new opportunities that come your way.
This is normally the time when a business will suffer a good deal of stagnation. The revenue will start to slow in pace (but not dry up), and your business will begin to feel the effects of your inability to handle the situation at hand. Without any kind of extra financing or preparation of capital beforehand, such stagnation is inevitable. Not all business owners have the necessary resource at hand – so without loans or invoice factoring or financing, things start to make a slow downward spiral. It doesn’t matter if the company is in the food industry, or even a travel agency, the result is the same more often than not.
The problem with loans
Let’s go back to the solutions provided to a small or medium sized company that’s beginning to hit its stride but faces stagnation. A loan is an obvious solution, but a very risky one. You basically have to put something up as collateral, you take a big risk when it comes to applying for a loan. Some companies manage to pull through and pay their debts, but most of the time that unfortunately isn’t the case. The amount some companies are willing to risk is simply too much, which is why this type of debt financing can be disastrous if you don’t know what you’re doing.
Utilising invoice factoring and financing
Compare that to invoice factoring or financing, where a third-party company buys your unpaid invoices from you in exchange for an advance of what the invoice recipient was supposed to pay in the first place (and a percentage of the invoice itself). Many smaller business owners know just how long it can take for clients to pay their invoices. The time frame is generally one to three months long, and the clients tend to make their payments right before their deadline. While it is still within the timeframe, this isn’t enough to help the revenue – which then hurts the company’s ability to evolve and make real progress. Invoice factoring as well as financing gives you time to change the company, and for less risk overall than with a regular loan.
A brief history of invoice factoring and financing
It might be hard to believe, but these types of transactions have existed longer than most people realise. It got its real start in the middle ages, when Jewish businessmen thought to lend money in return for the delivery and eventual payment of grain in Spain as well as Italy. A lot of transactions that involved this kind of lending had to do with trust, and making intelligent estimates – which the Jewish businessmen of the time were known for. This kind of lending eventually caught on in other places of the world, and continued to evolve over the years until it finally became the financing solution it is today. The reason why it has survived for so long is because of how effective it is overall, because it isn’t just the outright lending of money. Both parties are aware that they are exchanging things of value no matter what.
How does invoice factoring differ from financing?
While some might think that the two are easily interchangeable, that isn’t the case. If any business wants to make use of invoice factoring or financing, they need to know the difference between the two so that they don’t accidentally end up with the one they don’t want. When it boils down to it, the difference between the two depends on your answer to this question: do you see yourself using this kind of financial solution long term? Or are you simply using it whenever and wherever it suits you for a certain amount of time?
If you happen to see a long-term strategy in selling invoices, then invoice factoring is most certainly the best course of action. Through utilizing invoice factoring, you are allowing the factoring company to be the ones to collect the invoice payment that your client owes. It is also known for having cheaper percentages for longer contracts, which is why it’s an attractive prospect for anyone looking at the long-term.
What about invoice financing?
If however you are only looking for a short-term solution, invoice financing will be able to help you. They are generally cheaper than factoring agencies especially if you don’t intend to sign a contract lasting more than a year. Your company will still have to be the one to collect from your client, but considering the cheaper rates it’s certainly reasonable. It also tends to be the faster solution overall, giving you what you need as soon as you need it. The disadvantage other than having to collect what the clients owe you, is that it isn’t economical when you want to continue using it for more than several months at a time.
To conclude, there’s a very good reason why invoice factoring and financing are making strides in the industry today. That’s because they’ve been making strides in their own way since their inception. It’s something that many businesses have used with a good amount of success, and the system has evolved over hundreds of years to be more efficient and easier to utilize. It isn’t far-fetched to say that both invoice factoring as well as financing will continue to make strides, perhaps maybe evolving even further as the modern business environment evolves. Only time will tell, but the future is certainly looking bright as far as the factoring and financing of invoices go.
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