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  • Writer's picture Cashbook Finance


Business owners know how important it is to have capital if they want their business to succeed. While others could choose to bootstrap their business, it isn’t exactly a sustainable solution in the long run. It’s the reason why business financing exists.

If you’ve been in the business for quite a while now, then you’re probably aware that there are a lot of financing options that you can choose from. But one of the most common business financing that companies often overlook is invoice factoring.

Invoice factoring can be a helpful resource for businesses that have to wait for a few weeks to months to get paid for their products or services. With it, they can free up the cash tied up on the invoices and put the money towards sustaining the business – whether it’s to pay for the day-to-day business operations or invest in a business opportunity (i.e., expansion or business acquisition).

In this article, we’ll dive deeper into why invoice factoring for small business owners can be one of the best financing options.

What is Invoice Factoring?

But first, let’s be clear on what invoice factoring is and how it works.

Invoice factoring is a business financing option where small businesses “sell” their invoices to factoring companies at a discount. In this arrangement, the business gives up control of their sales ledgers, and the invoice factoring company takes over the company’s invoices. That also means that they will take over the payment collection from the small business’ customers.

Businesses that have to wait for 30, 60, or 90 days for customer payments often experience cash flow issues. Since their capital is tied up on outstanding invoices, it can be difficult for them to make ends meet on any given period without backup funding. Invoice factoring can be their financing solution. With it, they can receive advance payments for their invoices (usually 60% to 90% of the total value of the accounts receivable) and won’t have to worry about missing payments or business opportunities.

What Makes Invoice Factoring an Excellent Financing Option?

Invoice factoring for small businesses is advantageous for several reasons. Here are some of its upsides:

Small businesses can receive cash – FAST.

Businesses sometimes need fast cash to address time-sensitive business expenses. Whether it’s to handle unforeseen expenses or to invest in a time-sensitive business opportunity, invoice financing can provide you with the cash you need when you need it. In fact, some financing companies can get you the funds within 24 hours after approval.

You’re Not Acquiring New Debt

Technically, invoice factoring is not considered a loan since you’ll be selling your invoices to third-party factoring companies. By using invoice factoring, you’re advancing the cash you’ve already earned. This means that you won’t be acquiring additional debt.

No Need to Collect Payments Yourself

The fact that the factors assume the responsibility for payment chasing and collection is a big plus for small businesses that don’t have enough resources to do it themselves. Once you sell your sales ledger, the factoring company will take over. Once the invoices are due, they will do all the legwork and collect the payment themselves. This saves small businesses much time and effort.

It’s an Unsecured Financing

Invoice factoring is a type of unsecured financing, which means that you don’t have to present collateral to qualify. There’s no asset involved, so the factors can’t seize your personal property if the business’ customers fail to pay the invoices.

It’s Flexible Financing

The best thing about invoice factoring is that you can use the cash for whatever business initiative you have in mind, unlike other financing options where you can only use the finances for a specific business initiative.

Why Do Businesses Apply for Invoice Factoring?

As mentioned, invoice factoring is a flexible financing solution for businesses. That means that they can put the money towards any business-related expenses. By unlocking more cash through invoice factoring, companies will have more capital to grow their business. Here are some of the business initiatives it can cover:

1. Day-to-Day Expenses

One of the most common reasons why businesses apply for invoice factoring is to bridge day-to-day expenses. With most of their capital tied up on the outstanding invoices, it sometimes becomes challenging to come up with the funds they need to sustain their daily operations. With invoice factoring, on the other hand, they can take advantage of their invoices to get the cash they need for their daily expenses.

2. Bridge Seasonal Cash Flow Gaps

Seasonal businesses have periods of unsteady cash flow. During this period, cash flow is usually unstable. There’s no assurance that their profits will be enough to meet the business expenses – be it bills, payroll, inventory, or in preparation for the next peak season. Invoice factoring frees up the cash tied up on the invoices, so you won’t have to worry about missing your monthly payables.

3. Business Expansion

Invoice factoring can also support a business financially when they’re planning on expansion. With the additional capital, businesses can start planning for their next branch or develop a new product or innovative service that will lead to their business growth. Moreover, with enough cash to spare, businesses can take advantage of partnerships or business acquisitions to further expand their operations.

4. Purchase Inventory

Customer satisfaction is a vital component of your company’s success. With that said, you have to make sure that you’re giving them what they need when they need it. Through the funding from invoice factoring, you can make sure that your shelves are full and fully stocked, so you can serve as many customers as you want.

5. Emergency Expenses

Businesses often experience unforeseen situations that will require them to shell out a significant amount of cash to settle. It could be broken equipment that needs replacing, damages caused by natural disasters, or a failed inventory management that costs the company a lot. Regardless of what it is, invoice factoring can give you the cash you need to cover emergency expenses of any kind.

Final Thoughts on Invoice Factoring for Small Businesses

Invoice factoring is one of the most flexible financing solutions for small businesses. It’s easy to qualify for, and you won’t need to prepare a lot of paperwork to apply. But like any other business financing options, you need to do your homework first before applying. If you’re unsure where to find the information you need, the one above can be a great starting point.


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