As a business owner, you likely know the struggle that is waiting to get paid. Long payment cycles can quickly lead to cash crunches, making it difficult for you to meet your financial obligations and grow your business the way you want. Fortunately, invoice factoring can help.
What Is Invoice Factoring?
Invoice factoring is a way for certain businesses to boost their cash flow using their unpaid invoices. You sell these invoices to a company known as a factor. That company advances you the total of the invoices, minus 15% to 20% (sometimes more). They then take over collecting the payments from your customers. Once your customers make their payments, the factor gives you the rest of the funds, minus their factoring (and other) fees.
Benefits and Drawbacks to Factoring
Pros of using a factor include:
- Fast access to working capital for your business
- Your eligibility depends more on the creditworthiness of your customers than on yours
- Offer longer and more flexible terms to your customers
Cons of a factor include:
- They’re only available to B2B companies
- Rates are higher than conventional business loans
- You may be liable if your customer pays late (or doesn’t pay at all)
How to Choose a Factor
There are many factors out there, all of which have different rates, terms, and fees. Finding the one that works best for you will take a little bit of research. Here are a few tips that can help to make your search easier:
- Determine the services that you want. Do you want to submit all of your invoices, or would you prefer to pick and choose? Are you comfortable being liable if your customers don’t pay?
- Find out what industries the factor works with to make sure they’re a good fit.
- Check out the rates and terms offered by the factor. You should also look into what other fees or charges they might tack on. Keep your eye out for hidden fees.
- Find out how long it will take to get your funds once you submit your invoices. Some factors provide money more quickly than others. If you’re in a pinch, you might want to look for one that pays as soon as the next business day as opposed to one that might take a week.
Factoring can be a great solution for many business owners, enabling you to manage your cash flow more effectively and grow your business. Choosing the right factor might seem like a daunting task at first, but a little research can help you to compare your options and find the best fit.