Many career-focused couples choose to open their own businesses for the financial freedom and opportunities that it provides, often moving to places that have an enriching startup culture with a government that supports innovation. That’s why many turn to Kansas City, KS, which is known as one of the most small business-friendly cities in the United States.
There are over 50,000 businesses in the city that employ less than 100 people, with numerous lenders that offer capital to those who want to make their business dreams come true. However, loan volumes have fallen in recent years, making a strong cash flow essential.
Companies that rely on invoicing, such as transportation companies or construction businesses, may find it difficult to deal with long delays between completing a project and getting paid, which is why they turn to Kansas City invoice factoring companies to make up the difference. Let’s explore the little-known world of invoice factoring and discuss how it can make an appreciable difference in the success of your small business.
Invoice Factoring Is a Specialty Service for B2B Businesses
Those seeking the empowerment of wealth often find a B2B setup lucrative: these industries are less reliant on consumer whims and can provide steadier returns, as businesses will sign vendor contracts that can last years. There’s a problem with this model, though, which is the hassle of invoicing. With invoicing, you may have to wait days or weeks to get paid for your services, depending on your customers’ payment schedules; this can lead to serious cash deficits that imperil your daily operations.
Invoice factoring solves this problem. With this process, you sell your invoice to a third party, who you will pay a small percentage of the profits. Depending on the company, they may also charge service or origination fees. They advance you the majority of the invoice profits, then retain some while they pursue repayment from your client. Once the invoice is paid to them, they will send you the rest of the money, minus their service fees.
There are several types of invoice factoring depending on your industry, including freight factoring, which is for transit companies that can’t wait for payment after delivery. You can also open a Factoring Line Of Credit (FLOC), which has a limit based on your outstanding accounts and the creditworthiness of your own clients.
Benefits and Downsides of Invoice Factoring
Invoice factoring is generally used when you’re struggling with cash flow issues and can’t wait for payments. Perhaps you need to purchase supplies for another delivery or have suffered a sudden emergency that requires immediate funds to rectify. There are several reasons why you may choose invoice factoring over another option.
First, while you will have to pay a portion of your overall invoice to the factoring company, this percentage is much lower than what you would pay in interest on a short-term loan. The typical invoice factoring company takes only 5% of your overall invoice, but a short-term loan may have interest rates of 12% or more. You may find yourself in even more dire financial straits when you choose a loan with an exorbitant rate.
Secondly, invoice factoring offloads the difficulties of chasing a client up for payment. The company will collect the original payment from your customer on your behalf, including pursuing them if they fail to pay.
This can be very useful if you intend to keep that client on despite their slow payment, as the invoice factoring company will be the one handling the collection, not you.
Many invoice factoring arrangements are non-recourse, meaning that if the original client does not pay, the company absorbs the loss instead of you; however, these agreements will typically charge a higher percentage. If you find a company that uses a non-recourse arrangement, you can be guaranteed to recoup the majority of the payment, less the service percentage.
As with any business transaction, there are some downsides. This includes the aforementioned percentage that the company charges to utilize their services; depending on the size of the payment, this could be a significant chunk of money that you’re losing out on.
Additionally, you need to trust the invoice factoring company to treat your clients respectfully rather than harassing them for payment, which could damage your relationships with your customers and cause contract losses.
The Bottom Line on Invoice Factoring
Invoice factoring can be an incredibly useful service for small B2B businesses that are struggling with liquidity, especially when they are just starting out. A late invoice can cause a cascade effect of missed payments for your own debts, but you can avoid this by selling the invoice to a third party who will provide you with the majority of the profits. However, it’s critical that you work with a responsible invoice factoring team in KC that has a track record of successful, respectful collections. Read any agreement carefully to ensure there are no hidden fees, and check their references to ensure that they have a reputation for good customer service, both for their clients and for the invoiced customers.
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