Invoice Factoring 101

Invoice factoring is a way for businesses to sell their accounts receivable to a factoring company in exchange for cash. Unlike a normal loan, invoice factoring services provide you with cash that is already owed to your business by customers. The process works in three easy steps.

First, you sell your outstanding invoices to a factoring company, who will give you between 70-90% of the invoice total. This advance can be used immediately for working capital.

Second, the factoring company will collect payments from your customers directly.

Lastly, once the total invoice has been paid off by your customer, the factoring company will send you the remaining balance minus a small fee.  

Pros of Invoice Factoring 

Immediate Cash Flow 

Waiting 30-90 days for your invoices to get paid can be disadvantageous for a growing business. Additionally, some businesses may have to turn down big orders or they cannot meet necessary financial obligations. Fortunately, many factoring companies offer funding within the same day, which means you can keep your business running smoothly. Instead of waiting you can meet any short-term financing needs or have a safety net of working capital for any emergencies.  

Better Chance of Getting Approved 

Getting approved for invoice factoring can be easier than a traditional bank loan. Credit score and loan history tend to not even be factors in approval. Factoring companies are more concerned with the creditworthiness of their customers – since they will be the ones making payments to them. Instead of waiting weeks for approval and having to submit collateral, with factoring services you can get approved in 24 hours with no collateral required.  

Ongoing Cash Flow 

A business can turn to factoring services as many times as they would like to. Due to this, you can always have ongoing cash flow. Since you do not have to wait for invoices to be paid when you factor, you can always have extra cash to expand your business.  

Weigh your options about invoice factoring.

Cons of Invoice Factoring  

Dependency on customers 

A factoring company will determine your customers’ creditworthiness before approving your invoices. If they have a habit of not paying on time, they may be less likely to take on the risk of approving your funding. Additionally, depending on the factoring company, any non-payment from your customers may result in you having to pay for it.  

Costs 

Typical costs for invoice factoring are around 1 to 5 percent of the total invoice amount. The factor rate can be charged as a one-time fee or every week/month. This fee is a tradeoff for receiving immediate cash, but if your business is on a tight budget, it may not be beneficial for you to factor your invoices.  

With CapFlow Funding Group, the typical fees range from between 1 – 2%.  

Is Invoice Factoring Best for your Business?  

For a growing business, it is essential to make the best decisions to support and continue growing. Invoice factoring can help a business get working capital quickly, which in turn can help them cover operating expenses and expansion. The costs of factoring may be worthwhile to have a consistent cash flow. However, you should look into a factoring company’s maintenance, processing, or advance fees before working with them to help determine this.