Factoring invoices is a kind of invoice finance in which you “sell” all or some of your organization’s outstanding invoices to a 3rd party as a method of improving your revenue stability and cash flow. A factoring business will immediately pay you the majority of the invoiced amount, then directly collect payment from your customers. There are downsides and benefits to invoice financing, but for the sake of this article, we will just be focusing on the benefits, which we’ll cover in this article.
Invoice financing also is called debt factoring or accounts receivable factoring.
How does factoring work?
Factoring means selling part or complete control of your accounts receivable. It’ll work like this:
- You offer services or goods to your clients in the usual way.
- You invoice the customers for these services or goods.
- You’ll “sell” the raised invoices to the factoring business. The factoring business immediately pays you most of the invoiced amount, usually up to 80 to 90 percent of the value, after checking that the invoices are valid.
- The customers directly pay the factoring business. If needed, the factoring business chases invoice payment.
- The factoring business pays you the rest of the invoice amount – minus any fees – once they have been fully paid.
When should your business use invoice factoring?
Your small company ought to use invoice factoring once you regularly have lots of outstanding invoices and your cash flow is actually suffering because of it.
As one example, say your small business sells upon 30-day payment terms. The majority of your debtors are going to pay inside a 30-day timespan – some might require chasing, some might not – while other ones might go over the limit and need more persistent effort from you. This 30-day bit of revenue may represent most of your possible cash flow, yet you cannot actually use it. Factoring permits you to, almost immediately, release that money, or at least a significant portion of it. You might use these funds to:
- Take advantage of seasonal business opportunities
- Payback a loan
- Bridge short-term costs
- Or for any purpose for which cash flow may otherwise be a constraint
Five Ways Factoring May Help Your Business
Your small business is stable and expanding at a sustainable rate. Then, an immediate opportunity comes your way which might take your small business to the next level. For instance, a new client approaches you with multiple orders or a massive order.
Your initial response includes jumping at the opportunity. Unfortunately, the large order causes a problem for your organizations’ daily operations: Typically, it takes two months for the new client to obtain payment from its vendors to pay you – occasionally even longer. Now, you aren’t just holding a hefty unpaid invoice, yet you also require money for other company expenses such as supplies and payroll.
Left unchecked, that lack of cash flow seriously could hinder your capability of covering expenses such as paying your staff and obtaining supplies for additional projects. Business owners finding themselves in these circumstances wonder, “How will I get through the following two months and keep my business smoothly running?” If that sounds familiar, debt factoring might be the solution.
Age-Old Cash Flow Option
Far from a new idea, invoice factoring goes back 40 centuries to Mesopotamia. From medieval businesspeople to the modern-day services seen nowadays, factoring has a lengthy history of fulfilling the necessity of raising money. Traditionally, it was just simple for large businesses to access and use debt factoring. These days, many industries and companies turn to this cash option: small businesses, startups, and medium-sized businesses, businesses in a turnaround stage, and businesses experiencing fast growth.
Invoice factoring enables your small business to utilize its outstanding invoices to immediately generate capital. Basically, your small business is selling its accounts receivable to a factoring business for a discount. Then, the invoice factoring business rapidly advances the money required against your organizations’ unpaid accounts receivable. Your small business is merely receiving funds it already has earned for its immediate capital requirements, meaning you avoid taking any new debt.
Besides providing fast cash, invoice factoring also can be a long-range game changer for your small business. Here are five ways invoice factoring may transform the cash flow of your small business:
Factoring Places Money in Your Hands Faster
Many business owners utilize invoice factoring to address short-range cash flow gaps caused by unpredictable needs or emergencies. Instead of waiting months or a week to hear back from the traditional lender, your small business may set up a relationship with a factor and obtain money in a matter of days. For example, with some factor companies, money may be placed in your organizations’ account in as little as the next day.
Factoring Assists in Managing Dips in Cash Flow
Of all the challenges that businesses are faced with, cash flow absolutely ranks at the top of this list. For small businesses just starting out, waiting 30 days, 60 days or 90 days for customers to pay may create dips in cash flow challenging to manage. Factoring invoices offers a method of effectively managing the gap between when funds come in and when expenses become due. The fast accessibility to money invoice factoring offers will assist you in easily covering costs, such as supplies, as well as payroll.
Factoring Allows You to Pursue Opportunities
Besides filling short-range gaps, invoice factoring may assist in helping you seize opportunities; that involve those unpredictable opportunities to dramatically expand your small business. Once a prospective new client approaches you, factoring invoices offers the money needed to say “yes” to the project, purchase supplies, as well as cover payroll. You do not just get a new client, yet your small business additionally takes one step towards more expansion. It is easily possible to maintain your existing base of customers and still have the ability to serve more prominent clients that are going to help your small business grow.
Factoring Makes Further Expansion Possible
Even if lending that you used in the past is an option that is available to you, that doesn’t necessarily mean it’s the best money option for your small business. Unfortunately, many small companies that turn to traditional lenders soon discover themselves directly back where they began: in need of money to cover daily expenses, yet with an extra burden of debt. On the other hand, the quantity available through invoice factoring is just limited by the number of eligible invoices you must factor in. Therefore, invoice factoring protects your small business’s long-range financial health, making it the perfect option for an expanding company.
Factoring Will Save on Precious Resources
If you want to, it is also possible to take advantage of the other services with multiple back-office tasks, making invoicing more convenient. The help a factoring business provides with invoice collections and review, for instance, will free up you, as well as your administrative staff’s precious time. Once you factor an invoice, an invoice factoring business assists in collecting on the invoice so you can concentrate more on accepting new customers and searching out opportunities and less on payment collection, maintaining records, checking the progress of payments, etc.
Overall, invoice factoring is an excellent option for maintaining a consistent cash flow while additionally streamlining operations. The fast cash that factoring invoices offer will transform the cash flow of your small business, assist you in effortlessly covering daily expenses and offer the flexibility necessary to act on opportunities.
Other aspects to consider
You might not be interested in factoring services if you have a business that has a few customers. Invoice factoring is not appropriate for small businesses that have only a few main customers. Factoring businesses like to spread their risk as broadly as they can. They avoid a high concentration of invoices to only a handful of customers.
Remember, it requires a considerable commitment. Even though it sometimes is possible to factor a small number of invoices, most factoring businesses are going to want to take over most of your accounts receivable. Also, they might try and tie you into a lengthy contract, which might be more than two years. That’s necessary from their point of view, yet it means you cannot simply dip in and out of invoice factoring at any moment.
Get Professional Factoring Services
Many factoring services have built a dedicated and experienced staff of individuals who have years of experience in offering flexible solutions for cash flow that help small businesses thrive. Gas and oil services, temporary staffing, distribution/manufacturing, and transportation are simply a few companies that may take advantage of invoice financing services to produce money on hand. If your small business is searching for an alternative financing solution that meets fund growth or expenses, a factoring company provides a hassle-free, simple, fast setup. Find a factoring service for you today and see how they can help your small business grow.