Invoice Factoring – Turn Your Invoices Into Cash Fast

A successful business needs sufficient funds and a steady flow of cash to thrive. Many business owners struggle with receiving payment on a timely basis, which results in having a tremendous amount of cash in outstanding receivables. Instead of a steady flow of profits, owners are faced with the tough task of collecting their invoices in a professionally appropriate manner to avoid alienating their loyal clients.

Turning an invoice to cash is a great financial resource that enables a business to pay for its operating expenses and grow. Invoice factoring is an ideal financial solution for small and growing businesses facing late or overdue invoices. 

This article walks you through how the invoice factoring process works and helps you determine whether or not it’s the right financing solution for your business.

What is Invoice Factoring

Invoice factoring (also known as debtor finance) is an alternative, quick and easy financing solution for accounts receivables that offers an efficient way to improve cash flow. This particular financing service is especially ideal for businesses that sell to other businesses.

Extending credit to customers is usually a fundamental aspect when it comes to business to business transactions, allowing invoices to be paid within an extended period of time. However, problems arise when clients’ payments are overdue causing the business owner to become incapable of keeping up with their operating costs including payroll, taxes and insurance.

This is where invoice factoring can be fundamentally important. In simple terms, invoice debtor finance companies use your business’s outstanding invoices as collateral in exchange for a short-term loan, providing you with the cash you need to cover your expenses and saving you debt buildup while maintaining your company’s credibility.

How it works

Invoice factoring provides three main services: funding, credit advice and invoice-collection assistance. It works by individually financing invoices, usually in two installments. The first installment typically covers 80% – 85% of the total invoice value and deposits the amount to your bank account after processing.

The second installment settles the sum total of the invoice. The remaining 15% – 20% is processed and deposited to your account as soon as your client pays the invoice in full.

With invoice factoring, you could get a 50% to 90% advance within a day. Factoring companies often offer financing advances with varying regulations. Ordinarily, a balance of 10% to 50% —not including the fees— is reserved until the customer pays the invoice. Fees vary from one company to the other, but generally, the average fee is 3% in addition to an extra weekly fee for each passing week until the invoice is paid by the client.

Invoice factoring advantages

For the right situation, turning invoices into cash can be a perfect solution to account for late-paying customers and slow and inconsistent flow of cash. Here are numerous additional benefits to invoice factoring that can be particularly useful for small businesses.

• Professional bookkeeping
• Improving and regulating a company’s financial flow
• Efficiently turn invoices into working capital without risk of debt
• Bridging the gap of slow payments
• Maintaining a stable, dependable flow of cash that enables your business to grow
• Immediate cash flow for your business within 24 hours
• Meet operating expenses
• Faster than traditional bank loans
• More flexible than lines of credit from banks
• Unlike a traditional bank overdraft, there is generally no need for real estate mortgage
• Maintaining your company’s ownership or equity standings
• Invoice factoring companies are more tolerant than banks because they anticipate a business’s potential growth as opposed to what they are currently making
• It is a stand-alone facility that can exist alongside other business borrowings such as loans, overdrafts and asset finance
• Avoid unnecessary interest charges
• Flexibility in choosing which invoices to factor
• Seize all growth opportunities, including new sales and marketing initiatives without worrying about sufficient funds
• Borrowing based on sales volume for easy growth
• Improves cash flow, working capital and budgeting
• Finance only your immediate needs

Who is it for

Invoice factoring is generally ideal for small or new businesses who are looking for fast access to cash to help them grow without the need to also take on the heavy burden of a bank loan. Another key aspect of this, is the fact that the factoring company providing the capital will take over the responsibility of payment collection from clients.

Many business owners are concerned about the effect that invoice collection can have on their relationship with their customers, especially when payments are overdue. However, it’s an uncalled-for concern because the lender or factoring company realizes the importance of fostering and encouraging good relationships between businesses. Startups and growing businesses often find that factoring lifts the burden of having to chase for payments themselves, allowing them to focus on building a good working relationship with their clients and build customer loyalty. Because the lending market is tough on thriving businesses, small companies often prefer using an invoice to cash service because they are more tolerable and flexible than banks.

Unlike bank loans, if your business’s credit and revenue are not especially large, you can still be eligible for invoice factoring. Invoice factoring is more concerned with the value of your customers’ credit because technically they are the ones actually paying the bills. This makes invoice factoring an option even if you don’t make that much profit, haven’t established good personal credit yet, or have a new business without a financial track record.

If you still need help deciding whether or not debtor finance is the right solution for your business, ask yourself the following questions. Are my finances straining under the burden of overdue invoices or slow-paying customers? Can I afford the invoice factoring fees? Would an alternative financing solution work better than my current system? If your answer to these three questions is yes, then invoice factoring is an appropriate solution for you.

Invoice factoring services allow your business to grow without accumulating debt or compromising your own or company value. By providing working capital in a timely fashion, invoice financing can help your company survive during periods of unstable sales or cash flows leading to a continuous and steady growth rate.

Don’t let a delayed payment or an unsteady cash flow, put your company at risk. Employ the right type of financing for your business to keep your finances running smoothly, and save yourself the hassle by turning your invoices into cash.