Do you have customers who are refusing to pay their invoices? You may not see too much of a dent in your cash flow if you only have one or two problem clients. There comes a time when enough is enough, however.
If you’re a small startup, there’s only so long that you can survive on being nice. If stern reminders aren’t doing the trick, you may have to hire a factoring service.
Invoice financing vs. factoring, which option will help you get your money faster? Both will give you almost immediate access to cash, but their costs and eligibility requirements are very different. Check out this guide to learn more.
What Is Invoice Factoring?
Factoring involves selling unpaid invoices to another company. You’ll receive an instant payment for the invoices, however, you won’t be able to keep the full amount.
The factoring company will take a small chunk out to take on the unpaid invoice. At the end of the transaction, the person or company that failed to pay you will now be responsible for paying the factoring business instead.
Why Use Factoring?
No matter what kind of business you run, invoice factoring can put you at a huge advantage. It will allow you to keep your cash flow going even if your customers don’t pay you.
The approval process is pretty quick and easy, and you won’t have to worry about putting anything down for collateral.
Fast and Ongoing Cash Flow
Small businesses can’t afford to not receive their invoice payments. They have a huge and expensive operation to run.
While you wait to receive your money, you still have to pay your employees and take care of your monthly bills. You also don’t want to have to say no to an amazing growth opportunity because you can’t afford to expand.
Factoring companies can give you the money you need to do all of these things and more. As soon as you set up an account with the government invoice factoring, you’ll receive a payment within a few hours of submitting an invoice.
You Have a Good Chance of Approval
If you don’t want to go through a factoring company to get your client invoices paid, you may end up having to take out a business loan. That can be easier said than done.
In order to get approved, you’ll have to show that your company brings in enough revenue to make your payments. Many lenders will want to know how many years you’ve been in business. If you’re not even out of your first year yet, it will be harder for you to get a loan.
You’ll need a strong personal credit score and business credit history. You can also get turned down for requesting a loan amount that isn’t deemed reasonable.
Invoice factoring companies don’t care much about your credit qualifications, so you don’t have to jump through as many hoops to get approved.
No Collateral Needed
If you are approved for a bank loan, you may have to put something up as collateral. If you can’t make your payments, the lender will seize your assets to cover your bill.
Invoice factoring works somewhat like an unsecured loan. You won’t have to put your office up for collateral to get approval.
Customer Flexibility
When you’re able to secure your cash flow, you can be a little laxer when it comes to requesting payments. You can afford to give customers several warnings before sending their invoices to a factoring company.
If you want, it will be possible for you to even offer them flexible payment plans because you’re not in immediate need of the cash.
What Is Invoice Financing?
Invoice financing will allow you to borrow money against your company’s invoices. What this means is the lending company will give you a portion of the total cost of your invoices.
Once your clients start paying back their debt, you’ll have to hand the money over to the financing company.
Why Use Financing?
Like invoice factoring, financing gives you immediate access to the money you need to run your business. You’ll only have to start making payments when the money comes in.
You also get to choose the amount of cash that you need, and you won’t have to drop any expensive business projects due to a lack of funds.
Get Immediate Access to Cash
You can apply for business financing while sitting in your office or car. The paperwork is pretty short and sweet. Even if you aren’t the most tech-savvy person, you shouldn’t have issues with the process.
Once you’re approved, the money could appear in your account within an hour or so. While you will have to pay the money back, invoice financing won’t lock you into a lasting contract.
Only Make Repayments When the Money Comes In
You don’t have to begin making payments to the financing company until your clients pay their invoices. End of story.
You won’t have to pay any interest, and these services don’t have any fixed-term repayments attached to them.
You Choose How Much Money You Need
If you use an invoice financing company, you choose the amount of money you need. You’re also in charge of how often you receive payment.
If you want, the cash can simply sit there until you need to withdraw it to take care of a business expense.
Project Security
It’s difficult for you to take on lucrative business projects when you have clients who owe you money. You don’t want to put yourself into debt with the large corporate company you’re partnering with.
Since invoice financing will give you instant access to the cash you lack, you can take on as many ambitious projects as you want!
Invoice Financing Vs. Factoring
Now that you know a little more about both invoice financing and factoring, let’s talk about why you should choose one over the other. They both have their own sets of pros and cons to bring to the table.
Cost
If you choose to go with invoice financing, the only amount you’ll pay is the cost of the service. This is a small slice of what the invoice is worth.
Factoring typically comes with a service fee, and you’ll have to pay a little bit of interest.
Minimum Invoice Amount
When deciding on invoice financing vs. factoring, you have to look at how far behind your clients are. If you only have one or two invoices to worry about, factoring should suit your needs fine.
If you’ve got a handful of clients who are refusing to pay you, you may have to go with financing because factoring has limits. Financing does not.
Ownership of Accounts
Another area where these two options differ is the ownership of the accounts. Financing allows you to stay in control of your customer’s invoice. You’ll still be responsible for making sure they pay what they owe.
With factoring, the invoice will be transferred out of your hands. The customer will have to pay their debt to the factoring company instead of you.
Eligibility Constraints
Most factoring companies will look at your credit score when deciding if you qualify. Your business will also have to be in a good place financially.
Factoring doesn’t depend on your credit score. Approval is based on your client’s scores and their ability to pay back their debt. If you’re not comfortable with the decision resting on someone else’s qualifications, financing might be the better option.
Turnaround Times
The last thing you need to think about is how fast you need your money. While both options are pretty quick when it comes to the approval process and putting the cash into your account, factoring is faster.
You should obtain your funds within 24 hours after putting in an application. Financing takes a few days.
Collect Your Invoice Payments
Are you falling behind on your company’s bills due to unpaid invoices? While you want to stay in your customer’s good graces, there comes a time when sending constant payment reminders isn’t enough.
To prevent yourself from going into debt, you have to get a little sterner. Invoice financing vs. factoring, which one will allow you to collect what your clients owe you without damaging your company in the process?
As you can see, the answer depends on how fast you need the money and your company’s credit score.
For more tips that will help you keep your company afloat, visit the Business & Innovation section of our blog.
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