Let’s start with the basics. Do you have invoices from reliable customers who have proven they will eventually pay you? If so, the next step is really fairly simple. Get in touch with a factoring company. Find out what they will pay you for the invoices. These percentages can vary widely. We normally pay 97% to 99% of face value. So if you have a $100,000 in invoices, you can receive $97,000 to $99,000 based on the details of your situation. Factoring companies will probably have you forward your accounts receivable aging report and examine three things.
- How many accounts receivable do you have?
- How long have the receivables been outstanding?
- What are the credit ratings and credit histories of the customers?
That was not meant to be self-promotional, but just an explanation of how factoring works. How it produces cash you can use for your business. How you can take a stack of unpaid invoices and turn them into cash on hand to invest in your business.
There are basically three ways to infuse your business with cash. You can get a loan, generate revenue through sales, or take on investors.
What Does It Cost You to Obtain the Cash You Need?
What is the cost of going to the bank and applying for a loan? First, you have to be able to get a loan, and that is not easy in the current environment. Even if you can, it may cost you some collateral that the bank wants to secure the loan with, or it may cost you a higher credit score because you are utilizing more of your available credit. It may only cost you the time and the hassle of filling out the application and revealing every detail of your company. Even if you get approved, it will cost you extra time before you actually have the money in hand to operate your business. Not to mention the cost of the credit each month in the form of an interest payment. So as you see, getting a loan has a cost.
The Cost of Taking on Investors
What does it cost you to take on investors? As every entrepreneur knows, it costs you a slice of your business. That costs you control of your company, or in other words, the ability to make your own decisions and run your business the way you think is best. It also costs you a piece of your profits, or future earnings. Either way, taking on investors costs you something.
The Cost of Generating Revenue Through Sales
Now this one is a little more fun to talk about because it is about investing in your business to make it grow, i.e. cash flow. The cost of generating revenue through sales is the cost of the cash you reinvest into operating your business better, hiring great employees, expanding your sales and marketing efforts, and producing improved products and services.
The question is: Is the business growth that could come from factoring your accounts receivable worth 1% to 3% of your invoices? I want you to seriously sit down and ask yourself that question. Is the ROI worth the investment of time to explore growing your business with your assets, not someone elses?