Factoring for Cash Flow: How to Eliminate Bottlenecks

Many businesses across the country are reporting the same problem: cash flow bottlenecks that threaten their survival. Fortunately, solving cash flow problems with factoring is a proven way to keep the money flowing. On this page, we’ll walk you through what’s behind this common challenge and how to leverage factoring for cash flow acceleration to eliminate bottlenecks for good.

The Basics of Cash Flow Explained

Cash flow refers to the movement of money in and out of a business. Think of it as the lifeblood of your business, ensuring that you can cover day-to-day expenses, pay employees, invest in growth opportunities, and meet your financial obligations on time. Positive cash flow means you have more money coming in than going out, which is crucial for keeping your business healthy and running smoothly.

The Problem of Cash Flow Bottlenecks

A cash flow bottleneck occurs when the inflow of money slows down or stops altogether while outflows remain constant or even increase. This can happen for several reasons, such as delayed payments from customers, unexpected expenses, or seasonal fluctuations in revenue. When a business faces a cash flow bottleneck, it might struggle to pay bills, fulfill orders, or take advantage of new opportunities, ultimately putting its survival at risk.

For example, imagine a small manufacturing company in Ontario that supplies custom furniture to retail stores. The company has steady sales, but its customers typically take 60 to 90 days to pay their invoices. Meanwhile, the business needs to pay for materials, employee wages, and overhead costs much sooner. This delay creates a cash flow bottleneck, where the business has bills piling up but insufficient cash on hand to cover them.

Many businesses face this exact issue, with nearly three-quarters of Canadian small businesses reporting cash flow issues within the last year, per Xero surveys. Business owners say these issues have left them unable to pay themselves, forced them to negotiate payment terms with suppliers, left them unable to pay their bills, and more. Overcoming liquidity challenges with factoring is a simple solution.

The Basics of Invoice Factoring Explained

Factoring as a financial tool for small businesses is a service where a business sells its accounts receivable (invoices) to a third party, known as a factoring company, at a discount. In essence, instead of waiting 30, 60, or 90 days for customers to pay their invoices, the business can receive most of the money upfront from the factoring company, often within 24 to 48 hours.

The factoring company then takes over the responsibility of collecting the payment from the customer. Once the customer pays the invoice, the factoring company gives the business the remaining balance, minus a small fee for their services.

It’s a way for businesses to unlock the cash tied up in unpaid invoices, allowing them to maintain smooth operations without waiting for customers to pay. Factoring is commonly used by businesses that operate on credit terms and need steady cash flow to cover their expenses.

How Factoring Eliminates Cash Flow Bottlenecks

Factoring is particularly effective as a strategy for improving cash flow because it directly addresses the issue of delayed payments, which is a common cause of these bottlenecks for many businesses. Let’s take a look at how it works in practice.

Immediate Access to Cash

When a business sells its invoices to a factoring company, it receives a significant portion of the invoice value—usually around 60 to 95 percent—almost immediately. This rapid influx of cash allows the business to pay its bills, purchase inventory, cover payroll, and meet other financial obligations without waiting for customers to settle their invoices. This is especially useful for small businesses that might otherwise struggle to bridge the gap between issuing an invoice and receiving payment.

Reduction in Collection Time and Effort

Factoring companies take over the responsibility of collecting payments from customers. This not only speeds up the payment process but also reduces the time and effort the business spends on chasing down payments. As a result, the business can focus on growth and operations rather than on managing receivables.

Predictable Cash Flow

With factoring, businesses can better predict their cash flow because they know they will receive a certain amount of money shortly after issuing an invoice. This predictability is crucial for planning, budgeting, and seizing new opportunities. It removes much of the uncertainty that comes with relying on customer payment schedules.

Improved Supplier Relationships

By maintaining consistent cash flow through factoring, businesses are better able to meet their payment terms with suppliers. This can lead to stronger relationships with suppliers, who may offer better terms or discounts for timely payments. It also reduces the need to negotiate for extended payment terms, which can strain relationships.

No Additional Debt

Unlike taking out a loan, factoring doesn’t add debt to a business’s balance sheet. The business is simply accessing funds it has already earned but hasn’t yet collected. This can be a significant advantage for businesses that want to avoid increasing their liabilities.

Eliminate Your Cash Flow Bottlenecks By Factoring

If you’d like to leverage factoring for small business liquidity, we can match you with a factoring company that understands your needs and offers fast payments for your unpaid invoices. To take the first step toward cash flow acceleration, request a complimentary rate quote.

FAQs on Factoring for Cash Flow