If you need quick cash for your business, you have come to the right place. In this guide, we will explain invoice factoring and how it can help you manage cash flow.

Invoice factoring is a form of alternative financing for businesses with pending invoices. It is an option to consider if you don’t want traditional bank loans or can’t secure the loans for other reasons. 

By factoring invoices, you can pay employees on time, order more supplies, and accomplish other financial needs while you wait for your clients to pay. To get this form of financing, you only need a credible invoice and a good factoring company. 

Keep reading for more insights and how to get started.

What Is Invoice Factoring?

Invoice factoring is a type of business financing whereby a company sells its invoices to a factoring company. The factoring company checks the invoice to evaluate the amount of money the borrower can get and then offers it.

Factoring invoices is simple; the borrower doesn’t have to wait long to get the money. However, the factoring company charges a small fee, ranging between 1 and 5% of the invoice value.

How Invoice Factoring Works

Here is a brief step-by-step guide showing how the invoice factoring process works.

Step 1: Find a Factor Company

A factoring company is any lender willing to buy your invoices and give you money in return. There are many factoring companies; you can choose one by checking their reputation and the amount they charge.

Step 2: Deliver Your Invoice

You should have invoices to qualify for invoice factoring. Create a copy of all the customers’ invoices and take them to your factory company.

Step 3: Evaluation

The factoring company will carefully examine your invoice to determine the maximum amount you can receive. Note that the company may not offer 100% of the invoice amount because that is risky. However, you can expect to receive between 75% and 90% of the total invoice amount. In most cases, the money is given to you in two installments. If the factoring company agrees to finance you, they will credit the amount to your account.

Step 4: Follow-Up

Your customers will send the money to your factoring company, which will follow up with customers to ensure they all pay. Assuming your clients pay, the factoring company will pay you the remaining amount after subtracting their fees.

How Invoice Factoring Benefits Businesses

Invoice factoring is an excellent type of financing for all businesses, mainly those with slow-paying clients. Before the clients pay, this financing allows the company to get money to make more orders or meet other financial needs without pushing the clients. Here are the main advantages of using invoice factoring.

1. Quick Access to Funds

One of the leading benefits of factoring invoices is quick access to funds. Businesses that choose this financing option need fast access to funds so they don’t wait for clients to pay. A factoring company can disburse the money within a week or less after signing the agreement, which greatly benefits small businesses.

2. No Credit Score

Companies that offer invoice factoring don’t base the lending on your credit score. Instead, they check the credibility of your clients to pay based on their past payment records. Lack of credit score requirement is a great advantage to businesses with other pending loans.

3. Easy To Get

Applying for invoice factoring is more straightforward than acquiring a bank loan. With this option, there is less paperwork and stringent requirements. In some cases, you can finish the factoring agreement in two business days and receive your money.

4. Less Collection Efforts

The factoring company is responsible for pushing your clients to pay once you sign the invoice factoring agreement. As such, you don’t have to spend time or money pushing your clients. This gives you the freedom to carry out other business activities.

5. No Usage Limitation

The money you get by factoring invoices can be used in any way you choose! Whether you need to purchase equipment, pay rent, or hire employees, you can do so.

6. Cost Effective

Many factoring companies don’t charge more than a 5% fee of the invoice amount. The total cost of factoring invoices can, therefore, be cheaper than the interest you pay by getting a bank loan.

7. No Long-Term Debt

Factoring invoices is not like a traditional loan, which you pay over for a long time. The customers will be paying your factory company, not you. 

Is Factoring Invoice Good For Your Business?

Like other types of business financing, invoice factoring requires careful consideration to avoid making costly mistakes. You can consider factoring your invoices if:

• You need quick cash to meet customer demands
• Your business is still on loan and can’t qualify for bank loans
• You have a poor credit history
• You need to improve your credit rating
• You can’t handle data collection

Conclusion

Financial constraints in business will always exist, and some may be inevitable. However, when you have reliable financing options like invoice factoring, you can be sure of getting the money you need conveniently. If you are new to invoice factoring, ensure that the lender is conversant with your line of business, is reputable, and charges favorable fees. Also, understand the terms and conditions of the factoring agreement well to make a well-informed decision.