Balance Sheets and Invoice Factoring

For small business owners, there are often times when your balance sheet doesn't necessarily echo the financial state of your business. For those businesses that operate on an accounts receivable basis, the amount of money that should be or will be on your account books isn't always reflected there. But that doesn't make your business any less healthy and it shouldn't make it less attractive to potential financiers. Professional investors look to tangible indicators of success in evaluating a company's prospects - and those indicators are almost always found on the balance sheet.

For newer or start-up businesses that are hoping to acquire bank loans or an influx of capital from outside backers, invoice factoring can be a way to insure that your balance sheets or quarterly profiles reflect the current, healthiest state of your business. Invoice factoring is a practice wherein a business sells its accounts receivable invoices to a third party at a discount in exchange for immediate cash with which to finance continued business. Factoring is not a bank loan; it's not the business' credit that's up for inspection but rather the debtor's (i.e., the party named on the invoice). Once popular in early merchant banking activities, accounts receivable factoring is experiencing a resurgence in popularity as many small businesses struggle in the current financial climate.

There are many factors that attract an investor to a business, but fundamentally, they want to take the smallest risk possible for the greatest rewards, whether they're a microfinancier or a brick-and-mortar bank. Why give them any reason to doubt that your company would be a good investment? Investors want to make sure that your overall profitability is high. Are you able to operate at a profit? How does your profit compare to industry standards? Since investors may opt to be paid out of a percentage of profits, a lack of a profit margin may scare them off. Likewise, any shareholders or current investors consulting your quarterly financial reports will be reassured that your business is on track and their investment is safe.

By factoring your accounts receivable invoices, you are presenting an accurate picture of your company's financials, but you're doing it instantly. You're not waiting the 30 or 60 or even 90 days it may take for a customer to pay their invoice. Factoring companies can help you give potential investors a complete view of your company's financials and make sure that you're not disqualified from consideration for investment capital. The bar for gaining any kind of funding in the current financial climate is extremely high and invoice factoring can be an asset to many companies who want an advantage.

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