What You Need to Know About Invoice Factoring

If you run your own small business then you know just how essential cash flow can be. To keep the money flowing, many businesses use invoice factoring companies to ensure that money is always available for their company’s needs. For those of you just starting out in the world of small business, invoice factoring may be brand new to you or you may have misconceptions about what invoice factoring really is. So, we’ve outlined a brief overview and five of the most popular misconceptions about invoice factoring.

So what is invoice factoring? Business invoice factoring is a service provided to companies that allows you to receive upwards of 90% of your invoice immediately; rather than having to wait 30-60 days for your customer to pay. As a business you would:

  1. Sell your invoice to factoring companies, minus the invoice factoring rates (these vary between 1.5% and 4.5% per 30 days).
  2. The invoice factoring company would then pay you the agreed percentage.
  3. The customer then pays the factoring company then pays the full sum of the invoice.
  4. The factoring company pays the business the balance left on the invoice minus the invoice factoring rates.

That’s all there is too it. Though it is worth noting that invoice factoring is probably best used with clients who are reliable customers. Non payment of invoices can leave you responsible for the bill if you opt for what is known as recourse factoring. Some of you reading this may think that invoice factoring sounds a little bit like a payday loan for businesses. Not true, invoice factoring is an excellent way of ensuring growth for your business. Read on to learn a few more myths about business factoring companies.

The 5 Biggest Myths

1. Invoice factoring is a last resort for a business

If your business is failing then it is likely most reputable invoice factoring companies will not advance you any funds. The point of invoice factoring is that it generates cash flow, not bail you out. Invoice factoring companies will evaluate all aspects of your company during the setup process and determine if your potential in the long term is better than the current difficulties you might be facing.

It’s worth knowing that it isn’t just small businesses that use factoring companies. Hugely successful multi-million dollar corporations also use business invoice factoring as a way of generating cash flow and growth.

2. Invoice factoring is costly for business

It’s true that invoice factoring rates are variable depending on your circumstances and it pays to look at many factoring companies as it is a highly competitive field. However, invoice factoring is the same as any other service provided. It is a transactional rate, similar to that of the fee merchants pay on credit cards. You are paying a percentage of your invoice in order to release funds immediately. So consider carefully, without this injection of cash flow at the right time, could you be spending more in the long term?

3. Customers will lose faith in your business

Some perceive that if you hand over payment of invoices to a third party, it means that customers will think that you are somehow failing. Again, factoring is a common practice among successful businesses so many of your clients might already be aware of how it works.

Regardless of whether they know or not, invoice factoring companies are obliged to send notification to your customer that credit has been awarded to the business; they will be responsible for handling the invoice and that nothing will change for the customer other than who the invoice is made payable to. If you are still uncertain about client trust, many factoring companies will set up a line of communication that will make any notices seem like they are sent from your business.

4. Invoice factoring businesses won’t deal with very small companies or businesses that haven’t been up and running very long

While some larger more established factoring companies might decline your business, there are many more who are only too willing to accept you. As mentioned before, the market is competitive and invoice factoring companies recognize that they need to consider your future performance as well as your current situation. If you continue to grow in the future as a result of invoice factoring, then it could be very lucrative for the factoring company that initially put their faith in you.

5. You lose control over invoices that you want factoring

Factoring is carried out on an invoice by invoice basis and may need different requirements for each. It is possible, especially if you are using a factoring company regularly, to set up predetermined requirements for your invoices so you don’t have to go through the same process every single time. However, you maintain control of your invoices. Don’t forget, it is the factoring company’s job to provide a service, not take over your business.

Hopefully, this will assure you that invoice factoring companies are an essential part of business growth. Be sure to shop around to find the best company for your business and remember, deciding to proceed with a business factoring company could potentially determine the difference between your business’ success or failure – Good luck.