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Businesses are always looking for new ways to increase their cash flow. Whether it’s securing a loan, being approved for a line of credit, or considering alternative methods, finding working capital is paramount to the success of a business. With the ever-increasing difficulty of getting a loan, many startups and business owners find themselves looking toward invoice factoring to make up the difference while they establish themselves. Invoice factoring is a popular and attractive option for businesses seeking to improve cash flow and receive the payment they deserve for their hard work.
But how does invoice factoring work, and what separates it from invoice financing? We want to help your business understand everything it needs about invoice factoring in order to make the right decisions. That means filling you in on the benefits, drawbacks, and everything you need so that you can choose the right option for securing working capital for your company.
What Makes Invoice Factoring Different from Invoice Financing?
First, it’s important to establish that invoice factoring is very different from invoice financing, although people often confuse the two. Invoice factoring is also known as accounts receivable factoring. That means that it is financing built on services or goods that a business has already provided. Accounts receivable financing is particularly helpful for businesses looking to secure payment for any outstanding invoices.
Invoice financing and invoice factoring are different kinds of accounts receivable financing. Both allow companies to bridge cash flow gaps using their existing invoices. The key thing that separates the two comes in how the money is collected. In turn, these differences also play a pivotal role in how you determine which of these two options is right for you and your business.
Invoice Financing Keeps Small Businesses in Control
Invoice factoring stands apart in that your business is selling the entire invoice to a third-party company. Your company will receive up to 95 percent of the invoiced amount and can be credited the amount in as little as one day. Accounts receivable factoring can be ideal for businesses looking to receive payment on invoices of $50,000 or more.
Advantages of Invoice Factoring
You know that invoice factoring means giving your entire invoice over to a third party, but what are the other advantages that make invoice factoring such an attractive proposition?
Capital to Bridge Cash Flow Gaps When You Need It
One of the advantages of invoice factoring that is most immediately apparent is the quick and easy access to working capital. Online invoice factoring is as efficient as possible thanks to modern technology. That means there are no lengthy application processes or long turnaround times. The end result is you get the money you need — when you need it most. This allows you to bridge any cash flow gaps quickly and effectively.
More Time to Focus on Your Business
There’s the old saying that it’s better to work on your business, not in it. Because you’re allowing another company to completely take over your outstanding invoice, invoice factoring helps to give you the extra time to focus on your business, rather than chasing down payment from a client.
Improved Chance of Approval
Unlike a traditional bank loan, your chances of being approved for invoice factoring are actually pretty good. This is because your existing invoices are acting as collateral. When you’re securing funding based on goods and services you’ve already invoiced, there’s significantly less risk for your lender. This means that you’re much more likely to be approved. This can especially helpful for startups or small businesses that don’t have the credit history required by most banks for loan approval.
It Doesn’t Affect Your Credit Score
Credit scores are important, and businesses work hard to be responsible and maintain or improve their scores. The last thing you need is having that derailed because of a cash flow gap. Because invoice factoring is based around your business sales, it doesn’t affect your credit history. There’s no personal credit check required so you can sleep soundly knowing that your credit score is safe.
Disadvantages of Invoice Factoring
There are plenty of positives to taking advantage of invoice factoring for your business. Even so, it’s important to remember that, like with anything, there’s another side of the coin that is important to consider.
There’s a Cost of Doing Business
Naturally, as with any financial transaction, there’s a cost that’s going to be associated with invoice factoring. While this is usually a small percentage, it’s important to understand that you’re not going to receive the full 100 percent of the invoice that you’d get if you went after it yourself.
Lack of Control
Giving away control of your invoices can be a double-edged sword for many businesses. While it can often be a relief to have someone else do the work of tracking down payment, it also means that you no longer have any involvement in these invoices. While lenders are often exceptionally discreet and professional in securing payment, the idea can still make some business owners uncomfortable.
Invoice Factoring Can be a Financial Lifeline
The decision of whether or not your business chooses to pursue invoice factoring to secure working capital is never one that should be made lightly. Just as with any financial decision for your company, it’s important to step back and weigh the pros and cons to see if it works for you. Now that you have a better understanding of the advantages and disadvantages of accounts receivable factoring, you should be ready to start invoice factoring now and get your company the working capital it needs. For businesses stuck dealing with net terms for amounts that seriously affect the health of their business, invoice factoring can be a valuable tool.