New business owners are often shocked by the amount of time and effort they’re forced to spend on managing their finances. Billing clients, chasing down payments, covering expenses, tracking all of these transactions, and planning for the future is not an easy task. Worse, many entrepreneurs are forced to spend their time not only handling this but also overseeing employees, developing growth and marketing strategies, and often lending a hand in production as well. This can make it incredibly difficult to keep cash flow stable, and to stay on top of payment collection from late clients.
Invoice factoring is an ideal solution to this issue. Not only does it give business owners the tools they need to stabilize their revenues, it also simplifies payment collection to help free up much-needed time for other responsibilities. Moreover, it helps businesses avoid friction over payment issues with clients.
Dealing with inevitable cash flow interruptions
Small businesses in Australia alone are owed approximately $26 billion in late payments at any one time. Cash flow interruptions are practically unavoidable for any small businesses that don’t require up-front payment, which simply isn’t an accepted option in many industries. That means entrepreneurs have to be prepared to deal with unreliable revenues. A failure to address this issue can make a business far less competitive, and even drive it into default before it ever has had a chance to establish itself.
To bridge these funding gaps, businesses need fast access to funds, and that means short term financing. Invoice factoring isn’t the only option for this, but it’s an excellent front-line solution for many businesses. Sometimes you may need more funds than your outstanding invoices can provide, and in those cases traditional loans and other financing options certainly have their place.
How invoice factoring works
Traditional short term financing is a great way to get access to much-needed funds on short notice, but in many cases it means just another layer of financial complexity. A short term loan or a line of credit costs interest, and leaves business owners with the responsibility to come up with the funds for repayment themselves. They’ll need to pursue late-paying clients with even greater urgency to make sure they can control the debt they have.
Invoice factoring, on the other hand, is designed to provide short-term access to funds without the issue of traditional debt, while also freeing business owners from the burden of collecting payments themselves. When you factor your invoices with a financial institution like Fifo Capital, you trade your customers’ debt in the form of unpaid invoices for most of its value up front, with the remainder paid out when the client pays. By doing this, you can be absolutely certain when you’ll be paid, allowing you to plan your finances far more reliably. The secondary benefits, though, might be even more valuable.
Protecting your business relationships
Non-payment and late payments can quickly sour a previously healthy business relationship. In B2B relationships, client businesses often need to juggle a variety of payment obligations. If they run into cash flow interruptions themselves, they may attempt to informally renegotiate, delay, or even avoid payments to those partners who might be unable or unwilling to resist.
The lack of respect displayed by the client in that moment endangers your client relationship, and it’s extremely difficult to maintain a healthy partnership going forward once that occurs. Brand new business in particular tend to be insecure when trying to pursue a late payment while still hoping to hold on to a client. This can lead to miscommunication that makes it even more difficult to resolve the problem in a productive manner in the future.
Factoring invoices with an institution like Fifo Capital removes this threat entirely. When you use this service, your financial institution becomes a powerful ally, while also making it impossible for a late client to leverage your continued business relationship to ensure your cooperation. Since the financial institution holds the debt at the point that the invoice comes due, it will collect payment from your customer itself. A financial institution calling about an unpaid bill is far more likely to inspire a professional response and rapid resolution than a follow-up call by a supplier. In this way, you can completely circumvent an enormous amount of interpersonal drama that doesn’t belong in your business relationships in the first place.
Startups, and the entrepreneurs who run them, have far too much going on to deal with avoidable cash flow interruptions and unnecessary client management and retention issues.
By using tools like invoice factoring, you can stabilize your revenues while also freeing up more time that you can spend on driving growth and becoming more competitive. If you’d like to learn more, our representatives at Fifo Capital are always happy to advise you.