invoice for small business

How to Use Invoice Factoring for Small Business

July 15, 2020

Small business owners and operators are frustrated by unpaid accounts receivables. 60% of the invoices are usually paid late. Late payments can cause a lot of problems, especially cash problems. Late payments prevent you from paying for your rent, or paying your employees on time, or moving towards important opportunities for business.

Invoice factoring is a great solution to deal with cash flow problems. In invoice factoring, the factoring company takes responsibility and manages the credit control process and your sales ledger. They collect payments from your customers on your behalf.

Invoice factoring is much faster than a bank loan. Bank loans have strict policies to get approved, the loan approval process can take weeks sometimes months. Factoring can be approved in just 3-5 days. 

With invoice factoring services, you are just selling a valuable asset and not adding any more debt. Invoice factoring and bank loans are very different and have different terms and conditions. 

In this topic we are going to discuss how invoice factoring is benefiting small businesses and how does invoice factoring work? 

Also Read: Invoice Factoring: 8 Ways It Can Boost Your Business

WHAT IS INVOICE FACTORING?

Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring. Invoice factoring for small business helps the company to grow and develop.

Invoice factoring is a solution to cash flow problems. It provides short term capital by assigning and selling invoices to a factoring company or factor. The factoring companies usually give 70-90% of the invoice value in advance. Invoice factoring is an excellent option for businesses and companies that need access to cash quickly but are not able to secure a traditional bank loan.

There are several types of invoice factoring. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks. In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.

HOW DOES INVOICE FACTORING WORK?

The basic steps of how invoice factoring works are as follows:

  • Firstly, you submit your invoice details to the factor or the factoring company to check if you are eligible for the factoring services. The factoring company will then check your credit scores and client information and reach an agreement.
  • The factor will advance you the money, once there is an agreement.
  • The factor will then collect the invoice with your customers.
  • The factor or the factoring company will pay you the remaining balance of your money, once the invoice has been collected. They would also deduct a portion from the balance as their fee.

The factoring companies usually purchase the invoices in two parts. The factoring advance covers about 80% of the amount receivable. The remaining 20%, minus the factoring fee is given back as soon as your customer pays the invoice in full. 

Firstly, you submit the invoices for making a purchase. Then the factoring company provides you with the advance, which is 80% of the invoice. The customer then pays after 30 to 60 days. The factoring company then sends you the remaining 20%, after deducting their fees. You must choose a finance company and set up an account before you can start financing your invoices. 

PROS AND CONS TO INVOICE FACTORING

Pros:

  • Invoice factoring can give you access to cash quickly.
  • It is an ongoing cash-flow process; it doesn’t have to be a one-time financing option.
  • The factoring companies look at the payment history of your customers, giving you a better chance of approval.
  • There is no kind of collateral required. These are some of the advantages of invoice factoring.

Cons:

  • The fees associated with invoice factoring can be limited.
  • You will be responsible to pay the unpaid invoices if you are under the recourse invoice factoring agreement. This is one of the major disadvantages of invoice factoring.
  • The factoring companies might not take on your invoices if your clients have a habit of not paying you on time.
  • Factoring companies have access to the invoices of your company.

CHOOSING THE RIGHT INVOICE FACTORING COMPANY

You should carefully select the right factoring company for your business. The terms can be different from one company to another. You need to see if you require an industry-specific factoring company. Some of these industries include medical, transportation and construction factoring. You also need to know what types of factoring services they offer.

You need to make sure if the factoring company offers recourse or non-recourse funding? Every factoring company has different programs and terms and the fee structure is also different. You need a factoring company that meets your business requirements.

Choose a flexible factoring company. Choose a factoring company that has been in business for a long time and has proper experience. Factoring companies with strong customer service is also important.

Choosing the right factoring partner can be tricky and complicated. But you need to be sure which factoring company will be helpful for your business. So, it becomes important to check and know everything about the factoring company you select.

CONCLUSION

These were some information regarding what is invoice factoring and how does invoice factoring work and how invoice factoring for small business leads to growth and better cash flow.

Invoice factoring is very beneficial for your business if you have cash-flow problems. Invoice factoring can give you access to cash quickly. It is an ongoing cash-flow process; it doesn’t have to be a one-time financing option. 

The factoring companies look at the payment history of your customers, giving you a better chance of approval. There is no kind of collateral required. These are some of the advantages of invoice factoring. 

Invoice factoring services provide a flexible solution to deal with cash-flow problems. Invoice factoring can be used in most industries that serve government clients or commercial clients. Invoice factoring can be used by businesses that sell goods or services to another company. 

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