Invoice Factoring

Invoice factoring is the process of selling invoices to third-party financiers. It is a relatively simple concept of obtaining cash from a lender against the value of invoices. In essence, factoring is a short-term loan advanced to a business by a finance provider in exchange for an invoice.

Doing this helps the business avoid waiting for the customer to pay their invoice, subsequently saving them time and money. By using invoice factoring, the business can focus on its core competencies and not have to worry about waiting 30-plus days to get paid on outstanding invoices.

Learn more in our invoice factoring guide!

Cash flow is the lifeblood of your business. If you struggle or don’t have cash flow, you will potentially have to make very difficult cuts to your expenses to make payroll.

These cuts could include belt-tightening, which could lead to problems with employee retention. It may also force you to make difficult cuts in your marketing and branding. If you are new to invoice factoring, this can have a ripple effect that can be costly in the future.

The best way to ensure better cash flow is to obtain access to it more quickly. With that in mind, the benefits of invoice factoring include the following:

• Payment is made within a short period of time
• Invoice factoring is a flexible system that allows companies to add and buy back invoices as needed
• Invoice factoring can help your company pay bills on time, which increases corporate credibility with your suppliers and vendors;
• Invoice factoring helps businesses focus on delivering value to their customers and not be distracted by cash flow difficulties

Factoring is usually cost-effective compared to other forms of financing, which may take a significant amount of time to put through company processes and procedures. However, this isn’t always the case, so it’s always best to look into your options and compare invoice factoring to other financing options before you commit to anything.

Factoring invoices doesn’t involve as much administration as it previously used to, and this is why it’s slowly becoming a widespread practice. With invoice factoring, you can work on items that are not associated with the process. You can focus on managing your business growth instead of worrying about the paperwork.

Factoring invoices doesn’t involve your bank or the bank of your business. A factoring invoice is a loan you take to pay your outstanding invoices. The fact that it involves your company’s account is only there to prove that you’re a good credit risk, based on the fact that your company pays their outstanding invoices promptly.

Learn more about the difference between invoice factoring and bank loans.

Factoring invoices doesn’t involve an extra fee. In fact, a factoring invoice is the same as another invoice. The only difference is that it’s for a company instead of an individual.

Factoring invoices can get a transaction from point A to point B in a matter of days rather than weeks or months. This is because of the accessibility and the speed of the process.

You can borrow as much as you like through invoice factoring. However, the amount you can borrow is also determined by your business’s ability to repay the loan. This means that such factors will limit you!

Learn more about the common terms found in factoring agreements and contracts.

For many expanding businesses, time is perhaps the essential consideration when deciding whether or not to engage with factoring firms. In contrast to bank loans and government subsidies, which may take months to complete, factoring businesses can handle applications in as little as a few weeks. Small companies needing quick funding to deal with cash flow problems will find it attractive because of its low cost.

However, depending on how the loan is structured, the costs may be much greater than those associated with a conventional loan. Sometimes, a bank may be the best choice for your small company if you can afford to wait longer and are reasonably confident that your loan will be granted. Even when they are qualified for bank loans, some businesses determine that the time it takes to qualify for and receive a loan would be detrimental to their bottom line in the long run.

1. Positive Credit Score

You may have incurred debt as a small company owner or have less-than-perfect credit. Many alternative lenders are well aware of this. On the other hand, most respectable companies demand a personal credit score of at least 530 to be considered for financing.

2. Aligned Invoice Terms

Generally, finance companies advance invoices with a face value of at least $500 or more for clients. For minor bills (under $500) due from the same customer, some providers let you batch such invoices to satisfy the bare minimum requirement of one per customer. Most factoring firms demanded that the due date on your unpaid invoice be 1 to 12 weeks away before considering your invoice for factoring.

Learn more about how to use invoice payment terms for your business properly.

3. Clients With Good Credit Scores

The customers of the companies that are most suited for factoring are often those that have long payback periods on their contracts. Whether your company has excellent or poor credit, you may use your customers’ creditworthiness to qualify for invoice factoring.

Customers are focused on getting high-quality products and services from your company. Most customers want to pay their invoices on time and have little concern about the address where payments are sent, as this is often an accounting department transaction. Factoring companies will notify your customers of the correct address and treat your customers as you would, with respect and kindness.

Small and medium-sized businesses often struggle financially, especially when learning to manage rapid growth. They have to wait until their clients and customers pay pending invoices. Factoring receivables, in this regard, makes a convenient way to finance businesses that are going through a rough patch and have a limited cash flow. Precisely, a factoring company as an intermediary buys invoices and pays businesses in advance to manage the working capital.

Factoring helps businesses, particularly startups, get off the ground and aggressively grow them by providing the necessary funds. With this immediate working capital, companies can gain traction, boost revenues, grow, compete against giant brands, and better manage their finances. If your small or medium-sized company is looking for easy alternative funding, invoice factoring can definitely help it pursue aggressive growth.

Invoice factoring is essential in helping you maintain healthy relationships with your customers. However, you can’t do it alone—working with a professional factoring company is important to reap the benefits of investing in invoice factoring. For the best quality of service, we recommend reaching out to a factoring company that understands the value of your customers and delivers excellent service founded on expertise and knowledge.

When looking for a factoring company to help you form and grow your customer relationships, make sure to work with an organization that places great importance on communication. Since you’ll be using invoice factoring in every stage of development, they must make sure to relay everything you should know about each step for a problem-free process.

Revenue from factored invoices qualifies as taxable in certain situations. Your business will owe taxes if it sells its invoices to the factoring company or if the factoring company is a parent company that owns your business.

There are many situations where factored receivables are tax-exempt, along with the expense associated with factoring invoices. Your business will not pay taxes on income earned from factored receivables as long as you work with a third-party company based in the United States. Receivables are also tax-exempt when your business retains invoice ownership by exchanging the invoice for an advance rather than a payment. Additionally, setup fees, commissions and related factoring expenses are deductible.