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  • Writer's pictureDustin Thomas

Why You Should Get An Invoice Factoring For Your Business

Photo by Tima Miroshnichenko

Running a small business is hard enough, especially if you’re starting out and inevitably run into limited cash flow. And the only way to keep the business floating is through invoice factoring.

In this guide, we will share why you should consider invoice factoring – what it’s about, how it works, and the requirements to qualify for the application. You will also learn about the costs to avail of one, including companies and other ways which you can explore to finance your business further.

Invoice Factoring For Small Businesses: The Better Alternative

Factoring is an excellent alternative to traditional loans, especially for small businesses. Rather than approaching banks or lenders for financial assistance, people who own small businesses can collaborate with a company that provides small and medium-sized business invoice factoring.

What they do is access funds from distinguished accounts. These financing services specifically built this plan for businesses with 30- to 90-day net terms. It grants extra funding access for small to medium enterprises with unsettled invoices. In simple terms, invoice factoring extends the life of these businesses and keeps them afloat.

Why Should You Not Sell Your Invoices Immediately?

Factors usually buy your business’ accounts compared to traditional lenders that offer long-term loans, which will be detrimental to your business.

Once you factor in your bills, they are sold to the factoring company. Then they send you back the remaining percentage from the total value. The amount the factoring company took is partly considered payment for their services. The company is holding on to the funds collected for taking on such risks. After all, they still have to collect from the customers of your business.

Once they complete the invoice sale, you will eventually be responsible for payment collection. The company will contact the client who owes the invoice, and then the client will carry on the transaction with the factoring firm. Before selling your invoice, you should carefully examine your options, lest these financing services jeopardize the business-customer relationship.

How Important Is Invoice Factoring?

If only asking for invoice payments from your clients is simple enough, you would do it. Cash flow gaps are a nightmare for small to medium businesses since they restrict their potential expansion and risk stability.

Additionally, invoice factoring has better payment terms that favor your business. Small to medium enterprises usually do not have the privilege to offer their customers short-term invoices for various reasons.

Customers typically take long-term payment schemes, so if a business attempts to insist on the short-term one, those customers might not like it and transact somewhere else. They have other expenses to take care of, and a short payment term will put them at a disadvantage. In other enterprises, extended payment terms are part of their negotiation tactics to achieve the best deals possible.

How Invoice Factoring Helps With Cash Flow

Small to medium business owners can now benefit from invoice factoring due to the following reasons:

· Slower duration for payroll making

· Regulated hiring pool

· Mediated marketing & advertising investments

· Settling rent or recurring bills

· Quicker collection of unpaid invoices

· More materials for future projects

· New equipment

Businesses You Don’t Know Could Benefit From Invoice Factoring

These are the following industries that are commonly involved with invoice factoring and financing:

· Manufacturing Business

Their ample cash outlays at every project start require purchasing new materials and machinery. Labor costs are another considerable expense also. With invoice factoring, the payment for this type of business is done quickly and prevents delays.

· Recruiting Agencies

Staffing companies dedicate time and money to looking for suitable applicants that match the job description. They also handle the payroll for the staff and additional budget. Waiting for their clients to pay can be exhausting because they aren’t consistent or on time with the payments, putting the agencies at risk of losing money. This is where invoice factoring comes in as a Band-Aid solution with flexible options.

· Security Firms

Like recruiting agencies, security firms also struggle with maintaining their services and scaling talent pools without sufficient cash. The flexibility of invoice factoring helps in speeding up the process for these types of businesses.

· Courier/Delivery Services

Realistically speaking, any tangible goods will stay for a long time inside trucks in the middle of a delivery. But that doesn’t absolve the freight company of the responsibility to ensure the efficiency of their transportation. They can make no invoice until deliveries are done; hence recipients take a long time to pay. And transportation factoring helps these courier services get paid right away.

· Professional and Trade Services

Invoice factoring is worth a try for small businesses looking to mitigate the gap in their finances. And regardless of the industry, you fit in, this type of financing will ultimately help grow your business and impact your future credit score. If your business is struggling, invoice factoring will be your lifeline. You can look more into how the invoice factor works here.

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