Small Business Cash Flow Management: How Invoice Factoring Helps

It depends on whom you ask and how certain terms are defined, but some experts believe that more than 90 percent of small business failures can be attributed to cash flow management problems.

The amount of cash coming into your business must be more than the amount of cash going out. It’s as simple – and as hard – as that.

“Rule #1,” says a colleague who’s known for being, uh….blunt, “is that you have to take in more than you pay out. Then, none of the other rules matter.” Well.

Cash flow problems can result from under-estimating expenses, over-estimating future sales (the “pipeline”), lack of management experience or poor judgment, unanticipated interruptions to business conditions, and dozens of other factors.

Sometimes cash flow management problems can be tied to your customers – even your “good” customers – dragging their feet when it comes to paying your invoices. That’s not fair and no fun, but it’s the reality of dealing in a net 30 world.

Unfortunately “net 30” too often becomes net 45…or 60…or…

But what to do? Conditions for bank loans and credit lines are still tight for small businesses, and you’re probably not excited about taking on additional debt, anyhow.

Invoice Factoring

Invoice factoring, or receivables factoring, is a financial transaction that helps companies like yours get paid on the accounts receivable fast. What’s fast? Usually in one or two business days, and sometimes the same day you submit the invoice for factoring.

In a factoring arrangement, you sell an account receivable invoice to a third party, like MP Star Financial, for payment. There’s no need for running to the mailbox, groveling, wishing, séances, collection calls, or feeling resentful toward your customers. Best of all, you can concentrate on running your business instead of worrying about when “that check” might arrive.

Getting paid fast is great, but your company gets other benefits by factoring with MP Star.

  • Your administrative workload is diminished, because your people aren’t waiting on checks and making collection calls.
  •  If your business credit is sketchy, that’s probably okay. Factoring decisions are made based on the credit-worthiness of your customers, not your company.
  •  You do not add more debt to your balance sheet. The funds you receive from MP Star Financial represent your customers’ payments, not a loan.
  •  Your vendor relations improve, because you can pay your invoices on time, and potentially negotiate better terms.
  •  Your company’s credit rating gets better, because having cash in-hand exactly when you expect allows you to pay everyone when your bills are due.
  •  You can make investment decisions based on what’s best for your company’s growth plans, without worrying if you’ll have the cash flow needed.
  •  You can make quarterly and annual tax payments on time, and avoid costly penalties and interest charges.
  •  Your potential funds from factoring grow along with your business. There are no “fixed” lines of credit. As your business and receivables grow, so does your company’s ability to access the cash you need.

What does an Invoice Factoring Arrangement Cost?

MP Star Financial will provide you with a significant advance on the amount owed on your receivables, and then pay you the balance – minus the factoring company’s service fees – after your customer pays.

 

When you think about it, factoring turns your invoices into C.O.D. sales, which is much better than a 45- or 60-day credit extension to your customers. When compared to other alternatives like credit line payments, banks loans, or selling off assets to pay your company’s bills, the costs associated with factoring are very reasonable.

MP Star Financial engages in “no surprise,” completely transparent factoring agreements, where all fees and charges are explained up front. Before you sign-off, you will understand exactly how MP Star’s fees are calculated.

 

For More Information

Ready to learn more? Let MP Star Financial explain how factoring can help you get a better handle on your company’s cash flow management. Call for more information. (800) 833-3765, extension 150.

 

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1 Comment
  1. A lot of businesses have a “clean desk” rule in that they pay invoices as soon as they come in. By prioritizing invoices and even negotiating with vendors for modifications to the payment plan, a business can better regulate their cash flow. Don’t pay bills until they are due. This way you have a better sense of how much cash you actually have on hand.

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