A lack of cash flow is one of the most common challenges small business owners face. Are you dealing with it right now?
If money is tight and you need access to additional funding to grow your business or keep it afloat, there are lots of different approaches you can take to get your hands on extra money. One of the most effective options you might not have already considered is known as invoice factoring.
Never heard of this before? Read on to learn more about this process, the benefits it has to offer, and the right way to go about doing it.
What Is Invoice Factoring?
First, let’s cover the basics. Invoice factoring is a form of business financing.
This process involves a business selling its invoices to a factor (or third-party company). The company sells these invoices at a discounted rate.
Factoring is not the same thing as a business loan. It provides business owners with an advance on payments they’re owed from outstanding invoices. It also gives them working capital that they can reinvest into the company sooner than they’d be able to if they continued to wait for customers to pay them for their goods or services.
How Does It Work?
The process is pretty straightforward. You can break it down into the following steps:
- Invoice your customer for goods or services
- Send the invoice details to an invoice finance provider
- Gain access to a percentage of the face value of the invoice
- The invoice collection process gets carried out by an invoice finance provider
After the customer pays their invoice, you gain access to the remaining value of the invoice. The only exception is that a service fee is subtracted to pay for the invoice finance provider’s services.
Is It a Good Idea?
Invoice factoring is like any other type of business financing. There are times when it makes sense and times when it doesn’t. Before you move forward with this financing option, it’s important that you understand the pros and cons it has to offer.
In many cases, the pros of this process outweigh the potential cons. For example, taking this approach gives you access to more working capital, which helps you keep your business afloat while you wait for customers to pay up. It allows you to take advantage of growth opportunities that can make your business more profitable, too.
Invoice factoring is a good alternative to loans and borrowing as well. As a small business, you might have a hard time getting your hands on a loan from a traditional lender.
Even if you do get a loan, it might also have high interest rates and be more trouble to pay back than it’s worth. This option allows you to continue running your business without having to deal with the stress of paying back a loan.
When you choose the factoring approach, you also can take steps to build your business credit. You’ll be able to pay your bills on time with the money you get from factoring. This, in turn, will give your credit score a boost and make it easier for you to secure additional financing in the future (should you need it).
As you can see, factoring has a lot to offer. That’s not to say that there aren’t any downsides, though.
A common complaint about factoring is that you’re still held liable for unpaid invoices. If your customers refuse to pay, there’s still a chance that you might have to later. Remember, the invoice financing provider is not a collections agency.
Some business owners are also put off by the service fee that they have to pay to the financing provider. In many cases, this fee is worth the extra money they get upfront. You’ll have to decide for yourself whether or not you think it’s fair, though.
Invoice Factoring Tips
If you’re leaning toward giving invoice factoring a try, there are some things you should keep in mind to ensure it works in your favor. Here are some key tips to remember:
Do Your Research
Start by doing plenty of research before deciding to work with a specific invoice finance provider. Learn about their process and check their online reviews to see what other customers have to say about them before you trust them to handle this aspect of your business.
Learn About Rates and Fees
Compare several different providers before making a final selection. Make sure part of your comparison process involves looking at their rates and fees, too. Find out about their service fee and check to see if there are any other potential fees you might have to pay, such as termination fees or maintenance fees.
Read the Agreement with Care
Whenever you’re getting ready to work with a third-party company, you should always read the agreement with care before signing anything. This same rule applies when you agree to work with an invoice finance provider. Make sure you understand everything in the contract and are okay with it before you give away your signature.
Check the Timeline
Don’t forget to ask about their timeline for gaining access to your funds, too. If you choose a company that offers easy invoice factoring, you should get your hands on the additional money within about 7-10 days. Make sure you know how long it’ll take, though, so you can plan accordingly.
Is Invoice Factoring a Good Fit for You?
Now that you know more about invoice factoring and its potential benefits, what do you think? Does it seem like a good funding option for your business?
If you’re interested in factoring, be sure to follow the steps outlined above. They’ll help you through the process and ensure you maximize the amount of money you’re able to get for your company.
Don’t forget to check out some of the other articles in the Business/Finance section of our site as well. We have lots of other great resources you can use to further your business knowledge and help your company thrive.