What is invoice factoring?
Invoice factoring is a process by which you receive cash upfront for your invoices. It is a financing technique helpful – especially – to small businesses, but any sized business can take advantage of invoice factoring. It works when you provide a good or service to another company (or even the government). You create an invoice for what you have provided. Usually, your customer will need 30 to 60 days to pay the invoice. But you have already spent the time and money to provide the product or service. This makes cash flow tight, since you do not have payment for what you provided.
With invoice factoring, you take the invoice to a financing company that specializes in these types of arrangements. The company verifies that your customer is credit worthy (and therefore likely to pay), and advances you the cash for the invoice, minus some sort of fee. In this way, you get the cash when you need it, rather than stressing about when the invoice will be paid. The invoice factoring financer then collects on the invoice, rather than you having to do it.
Who can benefit from invoice factoring?
Invoice factoring, who is it for? Basically, any business can benefit from invoice factoring. If you are dealing with customers that are credit worthy, stable and reliable, you can take advantage of invoice factoring in order to loosen up your cash flow. Some of the industries where invoice factoring can be especially helpful include:
- Health care (doctor’s offices, hospitals, clinics, etc.)
- Retail and wholesale
- Government contractors
- Importers and exporters
- Employment staffing agencies
- Professional service providers (lawyers, advertisers, accountants, couriers, engineers, consultants, freelancers, etc.)
Indeed, nearly any business that is experiencing cash flow problems – or has issues with its own credit, can benefit from invoice factoring.
Benefits of invoice factoring
There are a few benefits associated with invoice factoring:
Immediate cash: The biggest and most obvious benefit is the immediate cash. It means that you do not have to wait 30 to 60 days until the invoice is paid, and deal with other possible delays to payment. Instead, you have the cash immediately. This means that, instead of being tied up in goods and services that you have not been paid for, your capital can be used for business expenses like personnel paychecks and purchase of materials.
Ease of process. The process is fairly easy, once you have an arrangement worked out with a financer. You can regularly use invoice factoring for certain approved companies, rather than always having to re-apply for financing. It is a streamlined process as well. Once you receive your cash for the invoice, the factoring company takes care of collection. You are then free to concentrate on running and growing your business.
Avoid trying to get a loan. Many small businesses, especially those in a state of expansion, or those just starting up, have trouble with credit. You might be one of them. You have already maxed out your credit with loans or credit cards to get what you need for things to get moving. Now, though, you need additional cash flow in order to keep them moving. Invoice factoring can help you avoid the banks that may give you a loan anyway, and allows you to get the financing that you need.
Free yourself up for additional financing later. One of the great things invoice factoring is that, even though it is essentially a short term loan, it does not show up as debt. This means that you can keep your cash flow moving – getting the capital you need – without it looking as though you are borrowing more money. And this can help you build your credit and free up room for larger loans down the road, should you need them.
Invoice factoring can truly provide you with cash flow solutions if you need more capital for your business. It allows you to continue to tap into your resources without having to continually try to get traditional loan financing from banks.