Small and mid-sized business owners need sufficient working capital to keep up with the ever-evolving market. Nevertheless, some businesses don’t have enough to cover daily expenses. If you need instant cash and you have unpaid invoices(pending accounting receivables), you may need to consider invoice factoring.
Business invoice factoring allows business owners to sell pending invoices to lenders in exchange for instant cash. The lenders, also known as factoring companies, fund up to 90 % of the cumulative account receivable value. The remaining amount(less factoring charges) will be given after the clients make full payments.
For instance, if your account receivables are worth $100k, you might get up to $90k upfront. The factoring company will hold a portion of the account receivable receivables value until the clients pay their invoices. After the invoices are fully settled, the company will send you a reminder of the cash minus the factoring charges.
What is a factoring company?
A factoring company is a 3rd party lender that buys account receivables at a discount. Note that your clients will know when you have taken on invoice factoring. Rather than paying directly to your company, they’ll remit payment to the factoring company you’ve chosen.
Before buying your account receivables, factors will look at:
- Your personal and business credit records. While your clients’ credit score weighs heavy, lenders must conduct due diligence.
- They’ll also look at your clients’ ratings. They need to make sure that they’re financially able to pay for the account receivables.
- Another thing the factor will look at is the number of years you’ve been in business with your clients.
The general rule of thumb is that if you have a stable relationship with creditworthy clients and a strong credit score, factors will consider you lower risk and offer you favorable terms.
Advantages of small business invoice factoring
The greatest benefit of business invoice factoring is that they are not a traditional loan. That’s because you are getting an advance of the cash you are owed.
Other advantages of invoice factoring include the following:
- Obtaining working capital without taking a loan
For most business owners, one of the first things they think of when they need additional cash is to secure a business loan. Nevertheless, taking debt might not be a smart move, especially if the business is struggling to stay afloat.
While securing a business loan might be useful, many business owners will prefer to get working capital without introducing new debts. Invoice factoring for small and midsize businesses lets you leverage pending invoices in exchange for quick cash.
- Faster turnaround
Many business owners know that the underwriting procedure for conventional business loans will take months and even months. If you want fast access to capital, you can’t afford to wait for long to get the funding.
After the transaction is approved, you will need to wait for one or two days before you get the needed cash. Whether you want to pay suppliers, make payroll or get the business through a hard time, invoice factoring will help. Nevertheless, bear in mind that if it’s the first time transacting with a factor, you might want to wait for 7 days to get the cash. After the first transaction, factoring the account receivables will be faster and easier.
- Higher chances of approval
When applying for conventional business loans, lenders will evaluate your credit rating, loan history, and collateral. But with invoice factoring, these factors will not matter. Factors rely on your client’s payment records and credit worthiness.
This offers them a concept of the level of risks they are going to take if they choose to approve your invoice factoring request. If you have a poor credit score or if you don’t have assets to be eligible for conventional loans, invoice factoring might work for you.
Why your clients will love invoice factoring
Irrespective of the numerous benefits of invoice factoring, some business owners might be hesitant to attempt it. That’s because they are concerned with their reputation as a company and how it will affect client relationships. They don’t know that invoice factoring will benefit their business and improve client relationships.