If you have a small business that encounters slow-paying customers, or perhaps you have a limited cash flow from time to time, you might opt for invoice factoring. It is a type of financing available for organizations that sell to other businesses on account, usually invoicing clients with 30, 60, or 90-day terms.
Businesses that don’t fit traditional bank lending qualifications or haven’t yet established a track record with a significant lender can find invoice factoring helpful. This type of financing is a means of acquiring faster access to working capital.
This article aims to lay out what invoice factoring is, how it works, and how your business can benefit from leveraging this financial product. Read on to learn more.
What Is Invoice Factoring?
One popular form of alternative financing is factoring. It is suitable for small businesses that don’t yet have an established and long banking record, ones that big lenders may not cater to.
A famous saying among entrepreneurs is that banks only give you money when you do not need it. After all, banks work on a line-based financing model based on the accomplishments of your business and the assets you currently have. This means that they would be happy to lend to you if you already have many assets.
But what about small businesses that are just starting out and trying to manage their cash flow? One way to access needed funds is by reserving them in your accounts receivable or factoring your invoices.
How Does Invoice Factoring Work?
Once you have established payment terms and issued invoices to your customers, all that’s left to do is to wait until you receive the payment. Unfortunately, not all customers pay their invoices in time, and your business cash flow can run into problems if you have too many pending payments. The good news is that you don’t necessarily have to wait out the full invoice term.
Instead of waiting for the set 30 or 60 or even 90-day pay period, you can receive an upfront payment from an invoice factoring partner, or simply put, receive a “factor” of your assets.
To understand more about the invoice factoring process, you should know the five basic steps involved, which are as follows:
- You sell the products and render services to your customers and clients.
- You sell the generated invoices directly to your factoring partner.
- You receive the funds minus the reserve from your factor as they send them to you.
- Your factor will wait for the allotted payment period from your customer.
- You receive refunds for the reserves minus the discount fee from your factor.
The invoice factoring process can be a tremendous boost to your cash flow. Another advantage of considering such a process is that your factor will assume, manage, and collect your financed debts on your behalf.
In addition, if you get a good factoring partner, they can provide you with transparent and accessible reporting. This means you are kept entirely up to date throughout the invoice factoring process, and you will know exactly how much and when you will get the payment you are owed.
Invoice factoring is something you should seriously consider if you are a small business owner. In leveraging this financial solution for your business, you will be able to enjoy many advantages that can eliminate the lack of funding, unnecessary waiting times, and a dried-out cash flow.
If you are looking for invoice factoring solutions for your business, work with us at Porter Capital. We offer our services to help you get the working capital that you need. When you partner with us, you can enjoy flexible financing solutions, improved cash flow, and competitive rates. Apply now and open more opportunities for growth.