Why You Should Consider Invoice Factoring for Your Small Business

Every business owner has to deal with invoices, whether you’re paying them or waiting to get paid by your customers. Most small businesses in the US turn to invoice factoring when they need money quickly, and it can be a great way to get an extra boost of cash when you need it the most. Here are some of the biggest benefits that invoice factoring for small businesses offers and why you should consider using this service for your business finances going forward.

How Does Invoice Factoring Work?

Before factoring a company’s invoices, an invoice factoring company will check its creditworthiness. The invoice factoring firm will make sure that your business has been in operation for some time, is currently making a profit and is also paying its bills on time. Once your small business has been deemed creditworthy, you can begin to factor in your invoices.

Why it Might Benefit Your Business

If you run a small business, you already know that your success hinges on strong cash flow. When cash is tight, it’s difficult to expand and make necessary improvements—and even to keep your doors open. In fact, 50% of all new businesses fail within 18 months because they lack sufficient capital to make it through those first few challenging years. One way to solve that problem is invoice factoring—an alternative financing option that allows small businesses to borrow money based on their outstanding invoices. Let’s take a look at five ways invoice factoring can benefit your business:

1) Instant access to funds: With invoice factoring, you can access working capital without having to wait 30 or 60 days for an invoice to be paid.
2) Improved cash flow: By reducing how long it takes to get paid by clients, invoice factoring helps improve your company’s cash flow position—which is crucial when trying to stay afloat during lean times.
3) Avoidance of late fees: Late payment fees can seriously hurt your bottom line and are often unavoidable with traditional financing options like loans or credit cards. With invoice factoring, there are no late fees as long as payments are made in accordance with terms set forth in your contract with factor.

How To Go About Getting Started

The first step to getting started with invoice factoring is to speak with a factoring specialist. The specialist will be able to explain how invoice factoring works and if it’s right for your small business. After that, it comes down to choosing a factor and signing on.

What Are The Best Options For Small Businesses?

The most common options are invoice factoring and invoice discounting. If you’re not sure which one is best, keep reading to learn more about how they differ. While both methods help small businesses secure working capital and ensure cash flow, they have different policies, lending periods and payout structures. Learn more about these options in our infographic above. When choosing a method of invoice factoring or invoice discounting, it’s important to consider your business’s individual financial needs as well as your preferences.

What Types of Companies are Good Candidates For Invoice Factoring?

Companies that are growing and are able to generate a high volume of invoices are generally good candidates for invoice factoring. Invoice factoring provides a way to increase cash flow so companies can make strategic investments, hire more employees, and expand their business. Factoring allows businesses that rely on credit lines or merchant accounts to manage their cash flow more effectively, meaning they have access to immediate funds when it’s needed most.

What Else Should I Know?

Whether you’re just starting out or have been around a while, factoring may be something to consider. But before we get into how invoice factoring works and what it does for small businesses, let’s go over some of the things you should know about invoice factoring. One thing that sets invoice factoring apart from other types of financing is that your customer has already paid for their purchase, so there is no need to collect payment first (as in most bank loans).

Also, invoice factoring for small businesses allows using of money from an account receivable as collateral—something not offered by traditional banks. For example, invoice factoring can help you avoid cash flow problems. If you are unable to pay bills because your customers are slow to pay, then invoice factoring can help bridge that gap between when invoices are due and when they are actually paid. Another benefit of invoice factoring is its flexibility: In most cases, you don’t need any personal guarantees or collateral upfront to secure a line of credit with invoice factoring.