The concept of getting working capital from of your invoices by using a factor may be a useful tool for the right set of circumstances. It could greatly assist in labor intensive contracts with strong creditworthy customers. Once landing a nice contract, when new employees are brought on they need to be paid on a regular basis. The typical scenario would have the staff start the job and two weeks later payroll is paid out of the company funds. A couple more weeks – more payroll, and finally an invoice goes out to the customer for the first month’s worth of work. The staff continues to work. 2 more weeks, and 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 payroll. If the contract is going well, more staff is being placed and the elastic band that is your working capital gets stretched to breaking point.
This scenario also plays out when products are sold by manufacturers. Replace employees and payroll with suppliers and raw material. The point is, if the company funds can get to the first invoice, the factoring company can assist the rest of the way. Each succeeding invoice can be financed as it is submitted to the customer, providing the cash flow to operate.
Invoice factoring is a useful tool to do a job,not a crutch. It is a bridge to a better future.