Invoice Factoring – A Great Option for Small Business Financing
Invoice factoring is a resource many business owners commonly overlook, even though it could be a valuable card to play depending on their financial situation. It can offer a very quick and much-needed infusion of funds, but there are some trade-offs that need to be considered. Here is what you need to know in order to make an informed decision.
What is invoice factoring?
On its most basic level, invoice factoring is simply selling your outstanding invoices, at a discount, in return for a lump sum of cash. The first thing to keep in mind is this is not a loan. If you have quite a bit of money tied up in outstanding invoices, without the resources needed to recover those funds as quickly as you need them, this could be a great option for you. Your business sells its accounts receivable to a 3rd party. The 3rd party, usually a lender, is then solely responsible for recovering the funds from the customer.
Pros of Invoice Factoring
- Immediate Funds— Invoice factoring offers improved and predictable cash flow in order to pay your vendors. This also gives the opportunity to extend longer payment terms to your customers, without making sacrifices to your own cash flow. This can have a benefit to your company, as well as cultivate loyalty with your customers.
- Ease of approval– You won’t have to jump through the hoops or offer the collateral that banks and traditional financing will require.
- Lines can increase as you need them– The lines of financing are directly tied to the invoice balances. As those increase, so can the number of funds you can receive.
Cons of Invoice Factoring
- Fees– The factoring company usually gives a cash advance of 80-90% of the full amount of the invoices. The fees on top of that can vary greatly depending on the creditworthiness of your customers. In general, factoring fees can go from .05% and 4%. Some fees are on a sliding scale depending on how quickly your customers pay their bills, so this is something to keep in mind.
- Loss of control– When you tap a 3rd party to recover funds from your customers, you lose the direct control of that conversation. Make sure to do your due diligence to make sure you maintain quality relationships with your customers.
In short, invoice factoring can have quite a few benefits for companies without established credit or access to collateral, seasonal businesses with lulls in cash flow, or a rapidly growing business who needs immediate access to cash in order to pay for inventory or overhead. If any of these things apply to you, invoice factoring could be a great resource to consider to keep your business thriving.