Most startups have to put up with cashflow problems where their clients are slow or refuse to pay. How can business owners deal with this kind of stress so that their businesses continue running smoothly.
Every business will face some hard financial decisions in the course of its lifetime. Startups are the worst hit since they have to factor in marketing, capital, rent and all the other costs that come with owning a business such as getting a license and being in compliance with the local authorities. So money is always a distressing factor that needs to be looked into carefully so that the business does not suffer or fall within its course.
When I first started my advertising agency, I had to deal with all sorts of client with a lot of patience. I wanted the pay checks but unfortunately, they were slow in coming and I would find myself at wits end as I tried to speed up things so as to be able to pay employees as well as buy stock and pay house rent. I was always late on cash and I really had to use a lot of convincing to my new employees so that they would not be poached by other better agencies who had better cash flows and would pay their people in good time.
Invoice factoring and invoice financing
According to Wikipedia, factoring is a financial transaction where you sell your accounts receivable to a third party at a discount. According to a Wall Street journal guide, you will get about 70 to 90% of what you were to receive had the client paid.
With invoice factoring, another company called the factor comes in and demands for money to be paid for work delivered on your behalf. So in this case, you do not have to worry and trouble yourself sending invoices and reminders to the clients to pay up. No the factor does the shoddy work for you. Of course, you will only get a fraction of the money because the factor also has a service charge and they are also putting themselves at the risk in case the client does not pay up.
However, you are freed to focus on working for other clients and you are paid upfront by the factor company so that you will not have cash flow troubles. Invoice factoring is way better than taking loans because with it, you are not to pay anyone anything after sometimes. The only charge is the small percentage that goes to the factor company as they ask your clients to pay up dues for work that you did for them. The downside of invoice factoring is that you do not have control over how your clients are handled while being requested to pay up.
Different from invoice factoring, there is invoice financing where you still retain control over getting your dues from the clients. You also receive 100% but you will pay up a service charge to the company that helped you get your payment from the client. You can learn more on invoice factoring vs. invoice financing at Fundbox.
However when you choose invoice factoring as your mode of collecting dues from clients, make sure that you do not make one of these costly mistakes.
There are scammers in all types of business and people who will always find ways not to pay even when you have done the best kind of work, you will still find yourself convincing them to pay up and it takes eons and eons before they actually do so.
Needless to say, I had to ask many suspicious clients to pay me via escrow upfront so that I was assured of money even before I did the work. This way, although I had to cough a little few for the service, I could now work with assurance that I was going to get paid at the end of the day and that money was actually waiting to be released after I had completed the job.
Before, I would work with client who contacted me through skype and other online communication apps and I would set to work only to have them disappear on me when the work was completed. They would just go and never be found again. It would also occur with some that they would start stories on how they were not finding their debit card and other tales. By then, my employees would be on my neck demanding for their dues which I could not cough up because it was unpaid.