As a small business owner, dealing with low cash flow due to outstanding invoices can be frustrating. It is not easy to wait for customers to pay for what they are owning when you need urgent cash to keep things going. In that case, you will need to think of a quick and easy solution to explore. That is why invoice factoring could be your best option.
In this post are important things you should know about invoice factoring and how it could be the best way to finance your small business. If your business is the type where customers don’t pay for goods and services right away, you will want to carefully read this post.
What is Invoice Factoring and How Does It Work?
Invoice factoring is sometimes referred to as “debt factoring” or just “factoring”. It is a kind of financial option that allows businesses to get quick cash by selling their unpaid invoices. A factoring company buys the invoices and pays the business forefront before the due date of the invoices.
Unlike what you might be thinking right now, invoice factoring is not a loan. It is simply an option for you to sell your invoices (money already owed to your business) at a discount in exchange for a huge sum of cash. When the invoices are finally ripe, it is the factoring company that collects the money from your customers.
Compared to a loan from a traditional bank, no physical asset is needed here as collateral. You also don’t need to meet a sophisticated requirement or wait for months before accessing the cash. It is easy and quick. All you need to provide are the invoices issued to your customers.
The company advances you the money you need and also deducts a certain amount as a factoring fee – usually from 1 to 5%. The company is the one to collect the money from your customers when the invoices are finally ripe.
What Are The Advantages Of Invoice Factoring?
1. Fast cash
Compared to loans from traditional banks, invoice factoring provides you quick cash so you can keep your business running smoothly. This is usually the best option if you need quick cash and can’t wait for your customers to pay up. You also won’t need to wait for weeks or months to get approved by a financial institution.
2. Ongoing cash flow
Debt factoring is an excellent option to maintain cash flow in your business. Since it is not going to be a one-time financing option, you only need to build a relationship with your factoring company for a steady flow of cash into your business. This is good for your business because you won’t have to wait for invoices to be paid before you can take care of financial issues in your business.
3. Easier approval
Invoice factoring is a perfect option especially for small businesses that have found it difficult to access capital from other sources, such as traditional banks because they couldn’t meet up the requirements. The only thing factoring company cares about is the validity of the invoices you are providing them and the credibility of your customers.
So even if you don’t have collateral or have a low credit score, getting funds from an invoice factoring company is very feasible.
4. It makes things easier on your business
The truth is that keeping track of outstanding invoices and contacting customers is time-consuming. Giving the job to a factoring company will make things easier for you. You will be able to channel your energy and time to other important areas of your business.
5. No collateral required
The only thing you need is the invoices – they serve as your collateral. So that means you don’t need to worry about submitting any other asset like equipment, real estate, or other inventory before you get the money you need. There is definitely no better option for small business owners to finance their business.
Are There Any Disadvantages?
Although invoice factoring remains one of the best options for small businesses to acquire quick and easy cash, it also comes with some cons. Some of the disadvantages of using invoice factoring are:
- High cost: the services can be expensive. The company will take a service fee from you. This often runs between 1 and 5% of the total invoice amount.
- Liabilities: in case some of your customers refuse to keep to the terms of the invoice and couldn’t pay at due time, you will be responsible for paying for those unpaid invoices.
- Getting cash will depend on your customers: This is usually the determining factor when seeking funds from invoice factoring. They will check the payment history of your customers to know if they can risk giving you the money you required. If you have customers that have the habit of paying late, you may not get any money from the company.
- Loss of direct control: know that selling your invoices to a factoring company means losing direct control over how they get the money from your customers. It will also mean they will be having access to your financial information. So you may need to double-check the reputation of the factoring company before committing your customers into their hands.
How Is Invoice Factoring Different From Invoice Financing?
When most people hear about invoice factoring, they quickly assume it’s the same thing with invoice financing. Well, the two are slightly different.
In invoice factoring, you sell your invoices to a factoring company to get quick cash. Here, the company is responsible for collecting payment on the invoices. But in invoice financing, you will still be the one to collect the payment from your customers.
So the major difference between the two is who is responsible for collecting the payment on the invoices. For a business that values dealing with its customers directly, invoice financing is best. But if you can trust a factoring company with collecting the money from your customers without it affecting the relationship between you and your customers, invoice factoring is the option for you.
Is Invoice Factoring Right For Your Business?
It doesn’t matter if you own a small, a startup, or a large company. Invoice factoring is great for any business size and type. However, you need to check and be sure it is the best option for your business. Remember that invoice factoring is great for a business that needs money quickly and has enough invoices to pay off the money they need.
Such a business will also need to check to see if it has the kind of customers that pay their invoices on time. You can also try using tools such as QuickBooks Dedicated Server Hosting from DaaS Providers for your invoicing needs. You should be sure the service fee on the cash you want to get is good enough for you, and you can handle the fact that another company will collect invoice payments from your customers.
If all these sound cool to you, then you can go ahead with invoice factoring. You will find it to be the best option for your small business.
