Guide to Invoice Factoring for Small Business Owners

As of 2020, the United States market size for invoice factoring is worth a staggering $4.7 billion. In the five years leading to 2020, demand for invoice factoring services has grown steadily, with the industry growing faster than the economy overall.

It’s easy to see why many small businesses regularly use invoice factoring services. As a solution for businesses looking to maintain a healthy cash flow, invoice factoring is perfect for companies in all kinds of industries. 

But exactly what is invoice factoring, and how does it work? How can invoice factoring benefit your business? More importantly, how can you choose an invoice factoring provider who meets your needs?

If you’re asking yourself these questions, you’ve come to the right place. In this comprehensive guide, we tell you all you need to know about invoice factoring so you can make an informed decision. 

Read on to learn more.

What Is Invoice Factoring?

Invoice factoring refers to a financial transaction where a business sells its accounts receivables to a third party at a discount. Other terms for invoice factoring include accounts receivable factoring, invoice financing, and factoring. 

Companies that factor their receivable assets are often looking to meet their immediate and present needs. They do this instead of waiting for customers to make payments as per the original contract terms.

How Invoice Factoring Works

One of the biggest attractions of invoice factoring is how straightforward the entire process is. As long as you have a business-to-business or business-to-government company that sells goods or services to creditworthy clients and you submit correct invoices, you’ll most likely qualify for factoring. 

Assuming you need to be paid much sooner than the original terms you agreed with your customers, you can decide to sell your unpaid invoices to an invoice factoring company.

The factoring company first verifies the validity of the invoices before purchasing them. The best invoice factoring companies can pay you up to 90 percent of the invoice amount, with money disbursed within 24 hours. 

Once the factoring company has purchased your invoices, it will receive payments directly from your customers. The company then pays you the balance of the invoice after deducting their fee. 

What Are the Benefits of Invoice Factoring?

So, why do so many businesses opt for invoice factoring over other financing options when looking to solve cash flow problems? Here are five reasons.

1. Factoring Gives You Immediate Access to Cash

When you need money to finance essential operations in your business, such as to pay suppliers or utilities, time is of the essence. You want a financing solution that’s simple to apply for and that provides cash quickly. 

A bank loan or line of credit can take days or longer between application and the time you receive the funds you need. These financing solutions may also require that you have upfront collateral such as inventory, equipment, vehicles, or intellectual property.

With invoice factoring, you don’t need to worry about any of that. The process is easy, and the paperwork minimal. Even better, you can access cash within a day.

2. Financing Terms Are Flexible

For many small businesses, accessing loans from banks and other conventional lenders can be challenging. That’s because most of these lenders prefer dealing with more established brands and institutions. 

When it comes to invoice factoring, even small businesses can easily access financing. Some factoring companies even cater to startups.  What matters is the ability of your customers to make payments for the outstanding invoices, not your net worth as a business.

Moreover, invoice factoring allows you to access more funds if you need to. For instance, if you experience dramatic growth in sales, you can ask your factoring company for more money.

3. Affordable Factoring Fees

Through the years, the cost of accessing invoice factoring has fallen significantly. Invoice factoring rates vary from company to company, so it’s wise to shop around and get multiple quotes.

Generally, expect to pay about 3 percent of your company’s turnover in factoring fees. 

4. You Only Make Payments When Customers Pay

Once you access invoice financing, you don’t need to worry about paying back the money before your customers settle the original invoices. You make no interest payments.

In fact, you don’t pay anything to the factoring company as they collect their money from your customers. When you use invoice factoring services, you don’t need to worry about making fixed-term repayments.

5. You Minimize the Risk of Bad Debts

Bad debts and late payments can quickly cripple your business. While you can still take legal action to recover your money from debtors who don’t pay you on time or at all, this is a lengthy and costly solution. 

Invoice factoring saves you from this problem as the funder will be the one to follow up on payments from your customers. They have experts who know how to handle these situations. 

Choosing the Right Invoice Factoring Company

The best way to maximize the benefits of invoice factoring is to work with the right factoring company for you. A bad invoice factoring service provider can cost you time and money, ruin your client relationships, and cause instability in your business. 

So, how do you identify the right factoring company for you?

Start by looking at the reputation of the factoring company. Recommendations, referrals, and online customer reviews can paint a clear picture of how trustworthy a factoring company is.

Consider their experience as well. Companies with a long history of providing factoring services are generally more established and dependable than new entrants into the industry. 

Check the terms and rates the factoring company offers. Factoring companies usually base this fee based on the total invoice value assigned to the factor. Compare multiple quotes and settle for a figure you are comfortable with. 

Use Invoice Factoring to Keep Your Cash Flow Healthy

Every business needs smooth cash flow to thrive in today’s increasingly competitive marketplace.

One way to access funds quickly is by using invoice factoring. All you need is to make sure you’re working with the right factoring company for your business.

Are you interested in reliable factoring services? Please contact us today to learn more.