Invoice factoring is the practice of selling an invoice at a discount to a third party. With invoice factoring, you give away the right to collect the debt to this third party in exchange for money. Let’s look at the four reasons why invoice factoring may be the best financing solution for your business.
Planned cash flow
One of the best reasons why invoice factoring may be the best financing solution for your business is the fact that you can plan when you will get paid. Most invoice factoring firms can pay you for the invoice within two days. You can then choose the date you are paid so that you have the cash to pay your debts or other obligations. You also avoid the risk of customers controlling your cash flow by delaying payment as long as possible, limiting your business’ ability to act. There is no problem with customers begging for credit extensions regardless of your need for money.
Another benefit of accounts receivable financing and factoring is that you can receive the money far faster than the time it would take to be approved for a loan. By using invoice factoring, you know you’ll get paid in a matter of days instead of hoping you’ll be approved for a loan before you need to pay bills or buy equipment.
Eliminating debt collecting
For a small business owner, time spent trying to collect on past due invoices is time not spent on more productive activities. If you use invoice factoring, you hand off the debt collecting activities to a professional. You also avoid the risk of making threats or demands that are a violation of the Federal Fair Debt Collections Act that the creditor could sue you for making. You also eliminate the risk of customers demanding a settlement or reduction from the amount due.
A side benefit of invoice factoring is that the collectors working for the factoring service are talking to the customer, not you. You eliminate the stress of trying to collect from a customer, and by taking emotion out of the business decisions, you can more easily evaluate their value and costs as a customer. If you sell the invoice to a factoring service, you can even cut all ties with a customer by ending the last financial relationship you have with them. Then you let go of the frustration and can focus on the valuable customers while gaining peace of mind.
Factoring agreements cost around 2%-5% up front, and then a set decrease on the value of the invoice as time progresses. In this regard, you will get less for a 90 days past due invoice than one that is 30 days past due. Conversely, the 5% factor you pay to get money in exchange for the invoice is less than the interest charged on short term business loans you may have to resort to when your customers are late paying.
Another benefit of accounts receivable financing and factoring is the fact that it doesn’t affect your credit. You already own the invoice, and the fund issued to you for the right to collect on the invoice is not debt. In this way, invoice factoring is far better for your credit score than taking out another loan because it doesn’t affect the amount of credit you have or percentage of credit used. You don’t have to go back to a bank and ask for a larger line of credit.
It also doesn’t matter if you have bad credit when you raise cash via invoice factoring. It is the strength of the payor of the invoice that the factoring company looks at, not yours.
A benefit of regularly transferring invoices once past due to third parties via invoice factoring is the fact that word will get out that you are taking steps to actively collect on what you are owed. If you regularly use invoice factoring, your customers learn that they can’t pay late without consequences or beg for credit extensions. If they can’t afford your product, they’ll either wait before purchasing it or take out a loan to buy your product instead of buying it and delaying making payment. If they don’t buy your product because they don’t have the money for it, you have more product available to sell to those who will pay now. This improves your company’s revenues.
You’ll also find that customers pay on time to avoid dealing with professional debt collectors. And that improves your cash flow while eliminating the cost of hectoring people to pay for what they bought.