Not every business can wait around for an invoice to get paid. Bills and salaries need to get paid. This is why some companies resort to factoring invoices. Invoice factoring is the process of selling some or all of your accounts receivables to a third party.
This allows companies to receive proceeds from unpaid invoices. Small business invoice factors enables companies like yours to finance short-term expenses by turning unpaid invoices into cash. It can be an excellent option if your company is facing financial difficulties and needs cash right away.
How does invoice factoring work?
Businesses typically will invoice clients for services performed. Some invoices get paid immediately, while others are due for payment in a few months. Invoice factoring companies review each invoice and the creditworthiness of the paying customer. If the company approves the invoice, it will pay the entire invoice at a discount. Business owners receive immediate access to most of the invoice funds. The invoice factoring company makes a profit once the customer pays off the invoice.
Who uses invoice factoring?
Businesses rely on invoice factoring to gain quicker access to funds. If a company struggles to make payments and can’t wait for customers to pay their invoices, they may turn to invoice factoring.
Is invoice factoring a loan?
Invoice factoring is not a loan. Businesses sell their invoices and receive slightly less than the invoice’s face value. The receiving party collects future invoice payments from the customer.
Can unpaid invoice factoring hurt my credit?
Unpaid invoice factoring will not hurt your credit. When you conduct invoice factoring, you sell an invoice instead of taking out a loan. If you took out a loan and didn’t pay it, your credit would take a hit.
How can my company qualify for factoring?
Companies need to fit the criteria to qualify for factoring invoices. They must make $5,000/mo and have invoices due for payment in 30 days or more. Invoice factoring companies will review each customers’ creditworthiness. Invoice factoring companies are less likely to buy your invoice if the customer has bad credit.
Who bears the cost of factoring?
The invoice factoring company bears the cost of factoring. They assume the risk of a non-paying customer. Taking this risk, allows the invoice factoring company to buy the invoice at a discount.
Example of invoice factoring
Invoice factoring helps businesses receive access to additional funds. Here are some examples of invoice factoring in action.
A trucking company urgently needs an extra truck. The manufacturer has several invoices that will get paid in 60 days. Rather than wait 60 days, the manufacturer sells the invoice to a company to get immediate proceeds. They use the funds to finance the urgently needed equipment.
A business owner stresses about paying this week’s salary. The invoice payments could cover it, but they won’t get paid in time. Invoice factoring gives the business owner access to the invoice funds now instead of in a few months. Those proceeds then cover salaries.
An ambitious business owner wants to raise capital to buy an apartment complex. Invoices due for payment in 90 days will provide sufficient funds. However, a competing bidder swoops in and makes a higher offer. Unable to wait 90 days, the business owner resorts to factoring invoices. The business owner receives sufficient funds to make a counter-bid and acquire the apartment complex.
Things to consider with invoice factoring
Invoice factoring provides numerous advantages, but it is not the best path for every situation. Before utilizing invoice factoring, consider these factors.
Funding time
How long will it take to receive the funds from selling your invoice? Funds should arrive quickly enough to cover urgent expenses. Some invoice factoring companies send over the proceeds within a day.
Flexible payment terms for customers
Invoice factoring allows you to receive immediate payment even if the invoice has longer payment terms. Knowing they can receive the proceeds right away, companies can provide longer payment terms to their customers. The lengthy payment term can turn new customers into long term customers.
Collateral
Some businesses use their invoices as collateral instead of selling them to another company. You will still retain responsibility for collecting payments but earn the entire face value of the invoice.
Cost
Invoice factoring companies will buy your invoices at a discount. While most companies ask for a small discount, some companies may get greedy. Make sure you sell your invoice at a fair price.
Credit worthiness
Invoice factoring companies assess a customer’s creditworthiness before making an offer. If your customer has a low credit score, buyers will ask for a higher discount for your invoice. Each business must assess the urgency of receiving additional funds and receiving funding through a different path.
Advantages of invoice factoring
Invoice factoring provides trucking companies and owner operators with quick access to capital. These funds can help with business growth or maintenance expenses. Approval is faster compared to traditional loans, and factoring invoices does not involve collateral.
Disadvantages of invoice factoring
Businesses factoring invoices sacrifice higher invoice payments for instant gratification. The invoicing company can poorly communicate with your customer when asking for invoice payments. This negative experience can lead long-term customers away from your company.
Invoice factoring vs invoice financing
With invoice factoring businesses are able to sell invoices at a discount in exchange for funds. This strategy lets you use your invoice as collateral. Through this structure, you continue collecting invoice payments from the customer.
Explore invoice factoring
Quick approval and instant access to funds attract many businesses to invoice factoring. Trucking companies use invoice factoring to assist with growth, equipment purchases, and other costs.
FAQ
Yes, invoice factoring is legal. It refers to the business practice where a company sells its accounts receivables (invoices) to a third party commercial finance company at a discount to obtain cash faster. This provides funding based on the value of a business’s invoices outstanding from customers.
To qualify for invoice factoring, the key requirements are that your business must have creditworthy commercial customers and have B2B invoices for delivered goods or completed work that are currently outstanding for 30 to 90 days on average.
Yes, fees from invoice factoring services are considered normal business operating expenses that can be written off when you file taxes, like other financial charges related to operating lines of credit or loans. Proper documentation showing fees paid must be maintained. traditional financing methods, and handling of collections can potentially affect customer relationships.
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