What is invoice factoring?

On Behalf of | Apr 9, 2021 | Commercial Collections |

Managing a business venture can be difficult, as you must control overhead costs while keeping customers happy. If your customers do not pay outstanding invoices, you simply may not have enough cash for payroll, supplies or even the mortgage. Fortunately, you probably have some options for increasing cash flow quickly.  

Invoice factoring has become popular in certain industries in recent years. Unlike a conventional business loan where you ask a financial institution for funds, invoice factoring raises cash using invoices your customers have not yet paid. That is, you sell your outstanding invoices to a factoring company.  

You receive less than your customers owe

Most factoring firms purchase outstanding invoices for between 70% and 90% of their value, so you may want to look for a factoring company that pays as much as possible. Still, if you opt for invoice factoring, you ultimately receive less than your customers owe you.  

You receive immediate working capital

Clearly, the biggest advantage of using invoice factoring is the immediate influx of cash your business receives. With just a short turnaround time, you can convert this cash to working capital. Furthermore, you do not have to worry about collecting from customers who may be reluctant to pay, as the factoring company does the job for you.  

You lose some control

Even though the factoring company takes care of collections activities, you may not like its tactics. If you have a close working relationship with your customers, handing them off to a factoring company may make you feel uneasy. Likewise, some customers may think less of your venture simply because you use a factoring service. 

Ultimately, invoice factoring is likely to be one possible way to raise cash quickly. If conventional business loans or lines of credit are not feasible, invoice factoring may be a short-term solution to keep your company financially solvent until a traditional loan comes through.