Invoice Factoring: What It Is And How It Works

Invoice

We’re long past the beginning stages of startup culture, and we see many new businesses start to flourish. Regardless of business size, companies are enjoying the range of the clientele they can work with, especially when it comes to B2B collaboration. Some business owners are not familiar with the ways invoice factoring can streamline their work to save their company money in the long run. Invoice factoring can keep the company funds flowing steadily so that business operations keep moving smoothly.

It’s not uncommon for up-and-coming business owners not to have a full grasp of all the options and resources their company can enjoy. Companies that frequently cooperate with other businesses are especially suitable for receiving the benefits of invoice factoring. When the main focus of your company is B2B operation, you’ll find that sometimes the funds required to keep up with expenses and salaries are lagging.

Factoring companies can help make up for time lost in lengthy payout procedures by cutting the cash shortfall directly without turning to loans. Keep reading to find out what invoice factoring is and how you can use it to your advantage.

What Exactly is Invoice Factoring & How Does It Work?

Small business owners typically enjoy some benefits relating to their company size and how they conduct business. If your customers are other businesses, you usually don’t get paid right away but send out invoices they need to fulfill in 30, 60, or 90 days. The long payout times can sometimes disrupt the business flow, but not if you work with an invoice factoring company. Invoice factoring can cut long waiting times and help you plan more efficiently for the future of your company and employees.

Invoice Factoring

Some starting businesses can confuse business factoring with a loan, but you will be working with your own company money every step of the way. By selling your invoices to an invoice factoring company at a reduced price, you can get your funds right away instead of waiting for your customers to pay you. Depending on aspects like the amount of the invoice, creditworthiness of your client, and your sales volume, the factoring fee is typically 1% to 5%, which is much better than taking a bank loan. Another aspect is the factoring type which can be recourse or non-recourse, and it refers to the party responsible for an unpaid invoice.

A recourse factor contract implies that you would have to replace the invoice with one of greater or equal value or buy back your invoice. With a non-recourse factor, you are not obliged to repay or replace the invoice, but you will have to compensate the factoring company for the risk with higher transaction fees.

Invoice Factoring VS Invoice Financing

The main difference between invoice factoring and invoice financing is the payment-collecting responsibility. With invoice factoring, you’re giving up control of your invoices to a factoring company, whereas with invoice factoring, you’re still in charge of collecting payment from your customers. Both invoice factoring and invoice financing serve the same purpose to businesses, but your company will be relieved of payment-collecting responsibilities by delegating them to an invoice factoring company.

Invoice Factoring VS Invoice Financing

Pros and Cons of Invoice Factoring

There are many positive sides of invoice factoring, like providing capital instantaneously, enabling you to improve your cash flow while still keeping your customers on their usual payment terms. Traditional banking has certain limitations for businesses, like criteria for collateral, personal credit, or operating history, but factoring companies only assess the value of your invoices. Since it is considered unsecured financing, invoice factoring does not require collateral in the form of inventory or estate they can seize if you do not pay.

On the other hand, not all types of business qualify for invoice factoring because mostly B2B transactions include invoices and not direct consumer transactions. You need to verify your customers don’t have a bad payment history to ensure that the invoice factoring company approves your application. Your annual invoice factoring fees could increase as a consequence of late payments. You should pay special attention to hidden fees, like those for applying, processing, and credit checks, as they could also accumulate.

Is Invoice Factoring Right For Your Business?

Invoice factoring is an easy way for companies to compensate for the time lost in waiting for clients to fulfill payments. The key to successfully implementing invoice factoring is planning. When working with diligent and stable clients, invoice factoring can give businesses a leg up and significantly improve their long-term outlook. If you are willing to go the extra mile, ensure you fulfill all the conditions of the invoice factoring company of your choice.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.