Pulling operational capital out of your invoices by factoring can be a useful tool for the right business situation. Accounts receivable financing is used primarily to assist in labor intensive contracts with strong creditworthy customers. When a company secures a nice contract, and hires new employees to do the work, they will have to be paid regularly. These new hires begin work on the contract. Two weeks later you have to make payroll out of the company funds. A couple more weeks – more payroll, at that point you may invoice the customer for the first month’s worth of work. The work continues, two more weeks, more payroll. A couple more weeks and if you are extremely lucky the customer pays on time and you have the money to meet your ongoing obligations. Over an extended period, this cash crunch starts to have a ripple effect on the business which can start a dramatic negative drag on operations.
The scenario described above can also apply to products that are sold by manufacturers. Replace employees and payroll with suppliers and raw material. The point is, if the company funds can get you to the first invoice, the factoring company can assist the rest of the way. Each succeeding invoice can be financed at the moment it is submitted to the customer, giving you the cash you need to operate. Invoice factoring is a useful financing tool. Not a crutch. It is a bridge to a better successful future.