Immediate access to cash for your business.Įasier and faster approval than traditional bank lending. To find out whether or not invoice factoring is the best choice for your business, let’s look at the pros and cons: Invoice factoring advantages vs disadvantages In this instance, you're selling your invoice to a factor with a 10% fee. This means that instead of waiting 30 days to cash in the entire $10,000, you'll get an advance of $8,000 deposited in your bank account. So, to resolve this instance, you decide to sell that invoice to a factoring company. At the moment, your cash flow is not in good standing, and you have some urgent expenses to attend to. Your company has a $10,000 invoice and expects your customer to pay it within the next 30 days. Let’s give an example to show you how it works: They then pay your company the remaining amount, discounting their fee. The factor charges your customers directly. The factor then verifies these invoices and pays typically around 80-90% of the values. Once you’ve raised several invoices, you “sell” them to the factor. You then send the invoices to your customers for those goods or services. Your business provides the regular good and services it always has. With recourse factoring, your company must buy back any invoices the factoring company didn't collect to pay back for funding.Īlternatively, with this type, the factoring company assumes most of the risk of non-payment by your customers (although, this does not mean that you are not responsible for any pending payments). This type is the most common type of invoice factoring. There are two types of invoice factoring - recourse factoring and non-recourse factoring: Normally, the factoring company verifies your invoices, funds up to 90% of the invoice face value, then collects on those invoices directly from your customers.Īfterward, they collect the money on the standard payment terms from your end customer, to then release the remainder of the invoice value to you, minus a small factoring fee – typically one to five percent.
Once you are approved to work with them, you can sell your outstanding invoices in order to boost working capital, avoiding the delay caused by long payment terms. What is a factor or factoring company?Ī factoring company (or “factor”) is the financing partner of your choosing that purchases your invoices in exchange for cash. It allows small businesses to unlock the cash value of their invoices long before their customers pay their bills. This way, since it’s a sale, not a loan, you are not impacting your credit, as you would with traditional bank financing.
Invoice factoring is a business financing transaction in which a business sells its invoices (or receivables) to a third-party financial company, commonly referred to as a "factor."įirst, you receive funds, and then you pay the factoring company back by selling a percentage of your unpaid invoices. In this article, we will walk you through the basics of invoice factoring, how it works, and give you the tools to decide whether it is the right business funding option for your business need. Invoice factoring is a very popular business loan alternative option since it’s good for businesses that need to wait longer than desired periods of time for their invoices to be paid. You have probably been looking for different ones to find the one that best suits your needs. Finding alternatives to aid this is very common, and invoice factoring can help.Īs a small business owner, there are a wide variety of financing options for your business. Are you a business owner waiting for customers to pay their outstanding invoices? You are not alone.
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