Invoice Factoring: What Is it and How does it Work?

Are you selling goods to other companies? Do you have customers who are not paying their invoices right away? You may want to know about this financing option. As a B2B (or B2G) business, you can turn your unpaid invoice into fast cash. There is no need for a stellar credit or collateral.

What Is Invoice Factoring?

Invoice factoring is a term that is also known as account receivables factoring. Technically, invoice factoring is not considered a loan. Instead, the factoring company buys your unpaid invoice at a discount in exchange for a lump sum of cash. The factoring company will own the invoices. Then, they will collect their payments from your customers, typically within 30 to 90 days.

Example for Invoice Factoring

You create a $20,000 invoice to bill your customer. Let’s assume your customer usually pays after 30 days. It would help if you had that cash instantly to re-invest in your business. You decide to turn to a factoring company that advances you 90% ($18,000) of the amount minus a 5% fee ($1000). When the bill is due, the factoring company will collect their payment and will provide you with the remaining balance ($1000).

Traditional banks often require stellar credit or collateral, so this option turned out to be one of the most attractive financial products for small business owners. If you chose to use this kind of financing, make sure you know that a third party will interface with your customers.


What Should You Consider with Invoice Factoring?

There are a few things you should consider before proceeding into a borrowing position. A bit of research can help you decide the right solution for your business. Usually, factors and financing providers will advance you between 70-90% of the unpaid invoice amount. Although, only after checking out the billed client’s creditworthiness can we claim that each institution has some different risk measurements. With invoice factoring, the rates are usually between 1-6% per month, in addition to processing fees and ACH fees.

What are the Advantages of Invoice Factoring?

There are other types of working capital loans, but invoice factoring has become substantially popular in recent years among small business owners. This is because the requirements are more flexible than other business loans. As long as your client has been regular with his bill payments, you probably won’t have any issues getting funded.

Flexible Cash Flow

Cash flow is the fuel of your business. As long as your business has enough cash flow in its pipeline, the smaller odds that your business will be impacted by unexpected financial distresses. For your business’s future, it is necessary to sustain positive cash flow and a solid balance sheet to take your finances one step forward.

Increase in Sales and Profits

Financing your invoices can help you boost your sales and capitalize on new business opportunities.

Easier to Qualify

Applying for this kind of financing would be more efficient and flexible in terms of conditions and availability. Assuming you are dealing with reputable companies.


Invoice Financing

With invoice financing, the lender gives you an up-front sum of cash against your unpaid invoices, typically 70-90% of the unpaid invoice amount. Your business is still responsible for collecting outstanding receivables owed by your clients. Once the bill is due, you’ll pay the lender back the amount borrowed, plus fees and interest. For example, you create a $10,000 invoice to bill your client. The invoice terms are net 30. The financing provider advances your business 80% of the invoice amount
($8,000). After 30 days, your client has sent a check for $10,000. After you receive the payment, your business keeps $1500, while the invoice factoring will receive the remaining amount of $8500. In total, you received 95% of the invoice value, while the invoice financing company receives $500 in fees.

Invoice Financing vs Invoice Factoring

Invoice financing is a similar process to invoice factoring. In both cases, the purpose of the product is to provide you an option for funding against your account receivables. With invoice factoring, the factor buys your unpaid invoice and collect its payments directly from your clients.

With invoice financing, the lender grants you a lump sum of cash against your unpaid invoice, and your invoice will be used as a personal guarantee. Invoice financing is the better option if you want to maintain control over your invoices and deal with your customers directly. It works better with invoice factoring if you don’t mind giving up control of invoices to a third party.

The Best Industries for Invoice Factoring


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