Do you find yourself constantly waiting on customers to pay their invoices? Are you held back from pursuing new business opportunities or expanding your business because you don’t have the funding? Factoring might just be the solution you’ve been looking for.
Invoice factoring, also called accounts receivable factoring, is a way to get quick cash from unpaid customer bills. If you set net payment terms for 30, 60, or 90 days, perhaps even up to a year, there are companies out there that will advance you a percentage of what your customers owe immediately.
By working with a factoring company, you can balance your cash flow throughout the month instead of waiting for the month's end to receive most of your payments.
The Advantages of Business Invoice Factoring
First, a quick definition. Invoice factoring typically means you are selling your accounts receivable to a third party at a discount. Accounts receivable is considered a liquid asset on your financials and, as such, may be sold like anything else. Invoice factoring works for virtually any business that sells goods or services to other businesses.
Selling invoices may sound intimidating at first, but there are many reasons why businesses turn to factoring instead of other traditional financing methods. Below are some of the advantages of invoice factoring.
Retaining Ownership
The most significant advantage to business invoice factoring over a traditional business loan is that you retain ownership over every part of your business. When you take out a business loan, your business is usually used as collateral. If you should default, the lender can take over all or part of your business to repay your debt.
With factoring, no part of your business is at risk. You do not need to use any part of it for collateral. Instead, you sell assets to someone else in exchange for a percentage of the face value to access immediate cash.
Because factoring passes ownership of your invoices to the factor, you no longer need to worry about repayment schedules or accounts receivable collections. Instead, you have access to between 60% and 95% of the face value of your accounts receivable now instead of later!
Quick Approval
Another difference between factoring and a traditional business loan is the speed of approval.
Applying for a business loan requires a long list of documentation and endless waiting to learn if you are approved for the loan and the terms. Everything depends on your business's credit rating and stability.
Applying for factoring is quick and simple. You are asked for identification, a voided business check, and your bank statements if you are new to a factor. That's it! The factor will evaluate your business according to its age and annual revenue.
What really counts with a factoring company is the creditworthiness of your customers. Instead of credit checking you, the factor checks your customers for their payment history and credit rating because once they purchase the invoices, they take on all the risks of collections.
The entire process takes about a week. Once you build a relationship with a factor, you can expect to be paid for additional invoices in a couple of days, if not a few hours.
Simple Application Process
Applying for factoring is extremely easy. Most factors use an online portal. It only takes a few minutes to answer some questions. There is no additional collateral or assets required beyond your accounts receivable.
Cash Now, Not Later
Factoring your business invoices releases the cash for you to use now instead of after the customer pays. Your cash flow evens out because you aren't always waiting for payments that tend to show up at the end of the month. Instead of the feast or famine of timed payments, you can have the cash to use when you need it.
Factoring is beneficial for businesses that invoice customers for large amounts but don't receive payment for long periods. Businesses that deal with multi-phase contracts, government contracts, or corporate clients find factoring makes an immense improvement in their cash flow.
How Business Invoice Factoring Helps Your Cash Flow
Business invoice factoring is a slightly easier way to obtain financing than other capital financing schemes. If you factor your invoices as you create them, you can have immediate cash just as though your customer paid in full at the time of purchase.
If your customers cannot pay in full immediately, or they negotiated a contract that allows them to pay over time, you might feel stuck with delayed payments. Alternatively, you can offer better payment terms to customers and pick up more business. Either way, factoring erases the problem of delayed funding.
How much easier would it be for you to pay bills every month if you aren’t waiting for a customer to pay? Wouldn’t having cash on hand make it easier to pay employees on time?
Business invoice factoring helps in other ways too:
- You can make payroll when business is slow.
- You can invest in marketing. If you retain a marketing agency, factoring provides the cash to pay the monthly retainer.
- You can buy more inventory and increase your margins. Buy when prices are low.
- Take advantage of temporary discounts offered by a vendor or a sudden business opportunity.
- Buy new equipment or materials for projects.
Consider how your cash flow would improve if your customers paid for everything at the time of sale. That's what factoring does for you. Not only will you save on materials and services when you can leverage short-term discounts, but you also won't pay penalties for late bill payments.
Employee retention is easier when you can pay everyone regularly. If you can save money in other places, you might be able to offer a raise or increase the number of employees you hire. Factoring can help you afford the added temporary help without losing your long-time employees if you operate a seasonal business.
Turn your unpaid client bills and invoices into cash. With factoring, you always have the funds to make improvements, endure temporary downturns, and grow your business without worrying about your cash flow.
