Invoice Factoring is a type of financing that gives a business the ability to access the working capital that is stuck in their outstanding invoices or accounts receivable.
This is a transaction where a business sells its invoices to an invoice factoring company to gain access to that tied-up cash.
The invoices or receivables end up being removed from the business’ books and are then added to the factoring company’s balance sheet instead.
Typically, the factoring company is purchasing the accounts receivable at a discounted rate and wait for the customers to pay the invoice, which could be 30, 60, or 90 days later.
Startups can qualify for factoring, as long as, they have at least one invoice!
A simpler explanation is that as a business, you sell your invoice to a factoring company and they buy it so that you get the cash sooner than you would while waiting for it to be paid.
You will no longer have that invoice in your books, but you still get the cash in the transaction.
Businesses tend to use invoice factoring for many reasons. A few of them include: (1) rapid growth, (2) long drawn out payment terms from their customers, or (3) a demanding payroll.
What are the Advantages of Factoring as a Financing Option for You?
- It’s like a line of credit that grows with the business
- Reduces Stress
- No Repayment that impedes cash flow
- No real limit – outside of good paying customers
- Not based on number of years in business
- Good for start-ups, medium, and large-sized businesses
- No requirement to factor if you do not need to
- No hard cost to getting set up
- Rapid approval and funding
- Accessible in a difficult lending environment
Industries Factoring Works Best For
- Staffing
- Transportation and Logistics
- Oil and Gas
- Manufacturing
- Distribution
- Service Providers
- Security Companies
- Government Contractors and Suppliers
When Will a Business NOT Qualify for Factoring?
Sometimes, factoring is not always a good fit for a business as a financing solution.
Some possible reasons are:
- Pre-Billed or Progress Billed Invoices
A factoring company cannot complete the service that the invoice is for, so the service needs to be completed before they can purchase the invoice. The service must be fully completed before a factoring company can purchase the invoice from the business.
- Businesses that solely invoice consumers
Factoring companies are a better fit for businesses that have more business to business or business to government receivables. A factoring company is usually purchasing invoices mainly on the creditworthiness of a business customer, they cannot purchase invoices that are to an individual.
- Businesses without accounts receivable
Plenty of businesses don’t have accounts receivable, like software companies, since they require payment before the service is completed. Accounts receivable factoring companies base their funding off outstanding accounts receivable, this makes them unqualified for invoice factoring as well.
If you would like to talk about your specific situation, please contact us by using our email.
Please include a phone number as well so that we can discuss your needs and see if Factoring is the right option for you.
