2020 was a difficult year for many businesses and 2021 may turn out to be challenging as well. With so many restrictions and unpredictable conditions, it’s especially hard for businesses that provide their services on credit.
Invoice factoring is a type of financing that helps you maintain consistent cash flow, even during uncertain times. What is factoring? Let’s take a look at what it is and why it’s one of the best financing options for businesses in 2021.
What is Invoice Factoring?
While not everyone is familiar with invoice factoring, the concept is quite straightforward. When you’re approved for factoring, you receive immediate cash for your accounts receivable rather than having to wait for your clients to pay their invoices.
When businesses send out invoices, they often provide a 30 or 60-day term to clients. This is convenient for your clients but it means waiting for a month or more to get paid. If your clients are late with a payment, it’s even worse. The main advantage of factoring your invoices is that you’re freed from having to wait to receive payment for your invoices. Meanwhile, for your clients, there’s no difference except that they’re paying the factoring company instead of you.
Benefits of Invoice Factoring
When people ask “what is factoring” they really want to know why they should consider using it. There are several reasons.
Boosts Your Cash Flow – In uncertain times, it’s especially important to maintain steady cash flow to meet payroll, purchase inventory and keep up with all of your business’s operating expenses.
Reduces Risk of Bad Debt – If your factoring service is non-recourse, then once the factoring company approves your customer’s credit and purchases your invoice, they take the credit risk.
Simplifies Your Business – When you factor invoices, you don’t have to worry about collections, which saves you time and administrative work.
Helps You Expand – The enhanced cash flow from invoice factoring makes it possible to scale your business. You can invest in marketing, new equipment, and anything else you need to take your business to the next level.
The Steps Involved to Factor Invoices
You can get started with invoice factoring quite easily in a few simple steps.
Deliver your products or services as you normally would.
Submit the invoice for factoring. It’s up to you whether to factor some or all of your invoices.
The factoring company verifies that the service you are invoicing for was completed.
You receive payment as quickly as 24 hours. Advances vary by industry, but you usually collect 75-95 percent of the invoice’s value at this time.
Your customer pays the factoring company. They can pay according to their usual schedule, such as within 30 or 60 days after receiving the invoice.
The factoring company sends you the remainder of the invoice amount minus the factoring fee.
Do You Qualify for Invoice Factoring?
If factoring sounds like a promising way to fund your business, you may be wondering if your business qualifies. There are a few criteria you’ll need to meet.
You must be a B2B business that invoices your business customers.
Your business customers must be reputable and have satisfactory payment and credit history.
Your accounts receivable must be free of liens or encumbrances.
Compared to other types of financing, it’s relatively easy to qualify for invoice factoring. Your business can be fairly new as long as you have paying clients.
Industries that Use Factoring
Many different industries are eligible for invoice factoring, including:
Trucking, Freight and Transportation
Telecom & Utilities Construction
Companies in many other industries that make B2B sales.