Small business owners need to manage their finances well for success. They may also want to invest in their business growth and development. To do this, they’ll need cash flow. This is the money flowing in and out of your business at a given time.

But it may take some time to invoice and process your earnings from clients. Because of this, you may want to consider debt factoring to help to improve cash flow for your small business. 

This guide will discuss how debt factoring improves cash flow, including:

  • What is debt factoring?
  • What are the pros and cons of debt factoring?
  • How does debt factoring improve cash flow?

What is debt factoring?

Debt factoring is when you outsource your small business invoicing to a third-party organisation. The factoring company will accept and process invoices for you. They’ll also let you access the money you earn from your business before the invoice is received or processed. 

You can gain a deeper understanding of what debt factoring is here. 

What are the pros and cons of debt factoring?

You may be wondering how debt factoring can improve cash flow. But, you’ll want to understand the pros and cons before deciding if it’s the right choice for you.


Early access to your money

The main draw of debt factoring is that it offers early access to your business earnings. Customers are legally required to pay out an invoice within 30 days, but you may need that money earlier. 

Instead of waiting for your invoices to be paid and processed, you can get the money from a factoring company. This will increase your cash flow and bring in money when you need it. 

Helps financial growth

Getting your cash early will help you grow your business. Instead of relying on your customers’ payments to process, you can use the money that debt factoring offers to invest in your business. 

Saves time

Debt factoring offers more than just early cash access. It also helps you save time. If you outsource your invoicing to a factoring company, you won’t be responsible for processing invoices. You also won’t need to chase customers for late payments. This will be one less thing to worry about in your small business daily operations. 


Costs your business and leads to temporary debt

You’ll need to consider your business budget to see if it makes sense to pay a factoring company to manage your finances and front your payments. They will also charge interest on the money they front you ahead of invoices. As a result, debt factoring can reduce your business profits despite increasing your cash flow.

On top of having to pay for debt factoring, the process also puts your business in temporary debt. 

Benefits depend on your business and customers

Debt factoring is often less beneficial to small businesses that are cash-heavy. For example if you have a coffee shop and customers often pay in cash, you will immediately earn at the time or purchase. But, if you take credit payments with longer processing times, debt factoring can help speed up that process. 

Plus, if your customers have bad credit, this might reflect poorly on your business and lead to higher interest rates or charges from your factoring company. 

Your factoring services reflect your business

Just as your customers affect your relationship with the factoring company, your factoring site reflects your business. If the company you use to take care of your invoicing is unreliable or unprofessional, that will reflect poorly on your business. So, if debt factoring is the right choice for you, make sure you find a reliable company that you can trust. 

How does debt factoring improve cash flow?

So, debt factoring can get your money to you earlier. But how does debt factoring improve cash flow? 

You get your money earlier 

The money you get from debt factoring may be money you already earned, but it increases your business’s cash flow over shorter periods. Invoices can take weeks to process, so if you use debt factoring, you can access the money you need for your business when you need it. 

As a result, you speed up the money coming into your business. Instead of earning a large sum at the end of a period, you can get cash continuously, so your small business doesn’t run out of cash as easily. 

Why improved cash flow is helpful

As your small business cash flow becomes more frequent, you can more easily meet the financial needs of your business. It will help you pay expenses for your business and consider your finances. It also means you’ll rely less on how quickly your clients pay for your services. 

You can use this increased cash flow to pay debt and credit payments on time instead of waiting for cash. Using debt factoring can ultimately help you avoid living payment to payment with your business. 

You can invest in growth

Improving your cash flow means you can invest in your business development. Debt factoring will give you the cash to put towards your business goals now instead of saving funds over a longer period. This will help you plan for the future of your business. 

Overall, debt factoring can help the financial health of your business. But, you’ll need to be responsible and honor your relationship with the factoring company. You can benefit from these services if you manage your finances well. 

Manage your cash flow with a simple app

As debt factoring increases your small business cash flow, you’ll need to consider how to manage that money best. Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Find out more here.