Invoice factoring and many other alternative financing options have historically been looked down upon by traditional financial institutions. This has often caused business owners to be wary of such funding options and overlook how beneficial they can be. This is unfortunate, as invoice factoring can be a great source of funding for B2B businesses to cover short term gaps in working capital. In order to see the benefits, it’s important to understand how invoice factoring works and when utilizing it can be beneficial.
Invoice Factoring Explained
When explaining invoice factoring, it is best to first establish that it isn’t a loan. It is an advance on money already owed to your business. In short, outstanding invoices are sold to a factoring company. These are not past due invoices, just invoices that simply haven’t been paid yet. The invoices are sold at a discounted rate. The business typically receives 70 – 90% of the invoice’s face value, providing immediate working capital. When the invoice is paid, payment goes directly to the factoring provider and they send the business the balance minus a small factoring fee, typically 2 – 15% if the invoice’s face value.
Benefits of Factoring
Because invoice factoring isn’t a loan, it can be used to get an immediate influx of working capital without taking on any additional debt. Although the interest rate on a traditional business loan can be less than the factoring fee, factoring can often be a better option in the long run. Applying for and receiving a loan can take weeks or even months and approval rates are low. Factoring approval is based on your customer’s creditworthiness and normally takes just a few days. Once approved, funding is typically received in 24 to 48 hours.
In addition to getting the funds you need quickly, you can use them for whatever business expenses you want. There are no covenants, as is often the case with a traditional business loan. Factoring allows you to remain in charge of your business without having to comply with a lender’s guidelines or provide them with monthly financial reports.
When to Use Factoring
As previously mentioned, invoice factoring is a funding option specifically for B2B businesses and there are various situations where factoring may be the best option.
Accounts with 30 day or more payment terms. It isn’t unusual for your customer to wait until the due date to make payment. While this can help them maintain a strong cash flow, it doesn’t help yours. When your cash flow needs a boost before payment is due, factoring can make that happen.
A project with an extended or delayed payment. With an extremely large project or a government contract, you may receive small payments throughout the project or may receive nothing until the project is completed. While taking on these large projects is great for building your business, they can put a temporary crimp in your cash flow. Factoring can keep your cash flow consistent throughout the project and position your company for the next big project.
Businesses experiencing rapid growth. For a relatively new company that has a sudden influx of new business, it can be a struggle to keep up. Working capital can be significantly reduced or even depleted, making it difficult to cover operating expenses or take on additional projects.
Invoice Factoring with CapFlow
Still not sure if invoice factoring is right for your business? We can help you figure it out. Capflow Funding Group will work with you to find the best funding solution to provide your business with immediate working capital. We service many different industries with a variety of different funding needs. Contact us today and find out how invoice factoring can help grow your small business.