Many businesses in the United States are on the small side. Small businesses are formally defined as those that have fewer 500 employees, and they make up the large majority of all businesses in the United States today, representing 99.7% of all American businesses. These smaller businesses may be new or they may occupy a niche that does not call for or even allow significant expansion, and at any rate, small businesses have been known to be highly successful. But a problem may be the cash flow, and small or new businesses often do not have cash reserves to fall back on if their profits drop, or if small carrier companies are waiting a few months for customer invoices to arrive. A cash-starved company may face bankruptcy unless they get assistance with finances, and this is where invoice factoring services come into the picture. Invoice factoring services can save a smaller company from going bankrupt while waiting for invoices to be paid, since invoice money may be slow to arrive even if the customer’s payment is not late (which it sometimes may be). Accounts receivable financing companies, better known as a factoring business, can help a client with their money in exchange for a fee. Invoice factoring services are a form of loans that client companies may make use of. What might a factoring service do for a small carrier company as a client?
The Work of Invoice Factoring Services
Invoice factoring services are a sort of loan that client businesses can take out, and unlike personal credit scores, which range from 300 to 850, business credit is on a 0 to 100 scale, and if a client company’s business score is good enough, invoice factoring services may be available.
A carrier company will lend its services to a customer, and charge an invoice as payment. However, even when invoices are paid on time, it may take two to three months for that invoice money to arrive, and smaller companies often cannot afford to wait that long. For this reason, a third party is brought in: invoice factoring services. The business factoring company will obtain the rights to collect 100% of the charged invoice instead of the client company, and in exchange, the factoring company will give the client company a large percentage of the invoice’s value, often 70% or 80% or so. This can save a smaller company from bankruptcy, since these small companies have constant expenses such as paying off trucks, paying staff, fuel or maintenance, marketing efforts, and more. Once the customer pays the invoice to the factoring company in full, the factoring company will give the client carrier company another percentage of the invoice’s value, often up to 92% to 98%, but never the full value. The invoice factoring company will keep the last few percentage points to themselves as the fee for their service. In short, the client company gives up about 2-5% of the invoice’s total value in exchange for getting most of the money right away, and this can save a client company from bankruptcy while waiting for an invoice payment to arrive. For many companies, this fee is easily worth it.
Getting the Best Deal
A business that makes use of factoring services will lose a small percentage of its invoice values due, but this cost may often be worth it, especially when one considers the typical finances of a small business. A U.S. Bank study, for example, revealed that among all businesses that fail, 82% of them went under due to cash flow problems, and this is the sort of problem that business factoring can help prevent for a client. And even if invoices are paid on time, a small company may not have reserves of cash to fall back on while waiting, and what’s worse, the numbers show that invoices are often paid late anyway. Nearly 60%, more than half, of all charged invoices end up being paid late, and estimates say that if all invoices were to be paid on time from now on, American small businesses could collectively hire over two million more employees due to improved cash flow. And with business factoring done, that cash flow will be even stronger.