Invoice Factoring: A Useful Financing Option for Your Business
Invoice factoring can be an attractive financing option for businesses looking to improve cash flow and access working capital. With invoice factoring, a business sells its unpaid invoices to a commercial finance company, called a factor, to receive immediate funds. The factor then collects payment from the customers directly when invoices are due.
How Invoice Factoring Works
The invoice factoring process involves three key players – the business, its customers, and the factor:
-- The business performs work or delivers products and issues invoices to customers with 30, 60 or 90 day payment terms.
- The business then sells or assigns those unpaid invoices to the factor. The business receives 70-90% of the invoice value upfront as a cash advance from the factor. This infusion of capital can be used to pay operating expenses.
- The customers pay the invoices owed directly to the factor when due. The factor charges a fee of 1-5% of the invoice value and returns the balance amount less fees already deducted to the business.
Benefits of Invoice Factoring
Invoice factoring offers several advantages over traditional bank loans:
- Quick access to capital – Get funding in as little as 24 hours without waiting months for loan approvals. This improves cash flow quickly.
- Flexible limits – Funding limits are tied directly to your sales and not fixed caps like loans. This allows your business to access more capital as your unpaid invoices grow.
- Easy qualification – Funding decisions focus on the creditworthiness of your customers rather than your business. So early-stage businesses find it easier to qualify.
- Low monthly commitments – You only pay for the invoices you submit for funding and there are no fixed monthly payments. This helps you better manage cash flows.
When Should You Consider Invoice Factoring?
If your business can relate to any of these scenarios, invoice factoring may be a viable option:
- You need funds to fulfill new orders but maxed out your business credit line
- Slow-paying customers are stretching your cash thin impacting growth plans
- You need to staff up to support growing sales but cannot finance payroll easily
- Sudden opportunities demand upfront funds you do not have readily available
- You win a large order but the customer wants extended payment terms
- Your seasonal business needs working capital between peak seasons
Businesses in industries with longer payment cycles like staffing, manufacturing, wholesale, distribution, business services etc. can benefit greatly from invoice factoring.
What To Look For In An Invoice Factoring Company
While evaluating invoice factoring companies, consider the following:
-- Industry experience – Pick a specialist that understands your customers and common payment terms.
- Funding speed – The faster you can turn invoices to cash the better. Opt for next-day funding.
- Transparent pricing – Avoid vague factoring fees. Seek fixed, competitive rates fully disclosed upfront.
- Responsible funding – Partner only with a reputable company that provides responsible funding matching your needs.
- Easy application – Go with a convenient and fast online application process.
- Strong customer service – You need a dedicated account rep you can reach easily whenever required.
Alternatives To Invoice Factoring
A few other options similar to invoice factoring that businesses can explore are:
- Accounts receivable financing – Similar to factoring but you retain control of collecting payments from customers.
- Purchase order financing – Receive financing based on outstanding purchase orders to fulfill orders.
- Revenue-based financing – Repay financing in installments as a percentage of your monthly revenues.
- Merchant cash advances – Receive a lump sum in exchange for sharing future card transaction receipts.
- Bank loans – Conventional business loans if you qualify and comfortable with fixed monthly payments.
Each option has its own pros and cons to evaluate before deciding what works best for your needs and risk appetite.
Is Invoice Factoring Right For You?
While invoice factoring offers easy access to much needed working capital, it comes at a higher cost than traditional bank loans. Carefully factor the invoice factoring fees against the cost of cash flow struggles slowing your business growth before jumping in.
For the right businesses, the cost is well justified to fuel their growth and take on new opportunities faster. Businesses already facing cash crunches can certainly benefit from evaluating invoice factoring to see if it is indeed a viable solution for their situation.
Resources
Reddit Discussion on Invoice Factoring Advance Rates – https://www.reddit.com/r/smallbusiness/comments/f1vile/invoice_factoring_question_about_advance_rates/
-Quora Post Comparing Invoice Factoring vs Loans – https://www.quora.com/What-are-the-pros-and-cons-of-invoice-factoring-as-opposed-to-a-bank-loan-for-a-small-to-medium-sized-business
When To Use Invoice Factoring – https://www.avvo.com/legal-guides/ugc/when-to-use-invoice-factoring
Selecting An Invoice Factoring Company – https://www.lawinfo.com/resources/small-business/selecting-an-invoice-factoring-company.html
-Invoice Factoring Alternatives – https://www.findlaw.com/smallbusiness/finances-taxes/invoice-factoring-alternatives.html