Many small businesses have trouble with cash flow sometimes. This isn’t something you should feel bad about, but you do need to find a solution. Cash flow issues affect business growth. Poor cash flow can also affect your credit score if it gets in the way of paying bills on time. Invoice factoring may be the solution you’ve been waiting for.
What Is Factoring and How Does It Work?
Factoring is also known as invoice financing or accounts receivable financing. As those names suggest, this type of financing involves your business’s invoices. A lender provides capital for outstanding invoices right away in exchange for a small percentage of the total value. In essence, you’re selling an unpaid invoice to a third-party lender. You get paid immediately and the lender makes a small fee.
Generally speaking, the process works by allowing you to select which invoices you want to factor. You can get a large percentage of the balance within 24 hours, and the rest is deposited in your account when your client makes payment on the invoice.
This type of financing isn’t technically a loan because you’re not borrowing money. You’re selling an asset. That means that you don’t have to make any monthly payments afterward. You get the funds you need, right when you need them.
What Are the Benefits of Factoring?
There are several reasons why this method of alternative financing is popular. First, as mentioned, there are no debts to worry about. Invoice financing doesn’t hurt your credit score. You can sleep easy at night knowing that your business is safe and there is no collateral at risk.
Speed is another benefit. The simplicity of invoice financing means you can get funds in hours instead of days or weeks. When emergency needs pop up, it’s a relief to be able to get working capital so quickly. You can keep your business running smoothly until problems work themselves out.
What Are the Downsides of Invoice Financing?
Invoice financing is best used for short-term purposes only, such as purchasing inventory, buying computer equipment, covering payroll or similar things. Companies that are struggling to make ends meet shouldn’t expect solutions from factoring because it only advances you funds from your own invoices, not lends you fresh capital.
Fortunately, factoring is easy to qualify for. Getting approved doesn’t depend on your credit score or time in business. As long as you have the invoices you need and your customers are trustworthy, you can generally receive financing quickly.