The concept of putting operational capital in play from financing your invoices by using a factoring company can be a useful tool for the right situation. That would include labor intensive contracts with strong creditworthy customers. After being awarded a new contract, fresh employees have to be hired to do the work and they need to be paid regularly. A typical scenario would have the staff begin work on day one. 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, more payroll. A couple more weeks and if you are extremely lucky the customer pays on time and you have the capital to meet your payroll. If the contract is going well, more staff will be hired and cash reserves begin to suffer.
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. Not a crutch. It is a bridge to a better future.