Introduction to Invoice Factoring
When you think of what you need to run a business, you might first start with people, materials and an office. But all of those things cost money. So, what happens when you have payroll to make, office space rent to pay and materials to purchase to fulfill an order?
While it’s one of the best-kept secrets in business finance, invoice factoring is actually a form of alternative financing that can get you the cash you need for your business right away.
What Is Invoice Factoring?
Invoice factoring is actually one of the oldest forms of business finance. It was first introduced in England in the 14th century and in the U.S. in the 17th century. So, what is it? First, let’s start with what it’s not.
What’s important to remember is that invoice factoring isn’t a loan. With a loan, you only have a finite amount of capital at your disposal, and you still have to pay back the principal amount plus interest. You also have to go through an application and approval process. Depending on how immediately you need your money, you might not have time for all of that.
Factoring isn’t a line of credit, either. With credit cards, you may have a certain amount you can use and an annual APR that could cost you thousands of dollars if you have an unpaid balance over time. If you have an APR of 17 or even 22%, financing everything with a credit card isn’t very realistic as an option. Even if you only need to use the credit card a few times, the interest can make that small principal enormous in the end, so you pay back far more than you took out.
Invoice factoring, in layman’s terms, is selling your business’s invoices to get the cash you need. You sell your invoices to a third party (a factor) and let them do the rest. With the advance from the invoice, you can get back to running your business instead of chasing down customers and aging invoices.
A factor is a third party that will be able to advance you most of the money from an aging invoice and collect on it from your customers. They can also provide you with guidance and financial advice throughout the process. When you work with a factor, you can boost your productivity instead of worrying about your outstanding receivables.Invoice factoring, in layman’s terms, is selling your business’s invoices to get the cash you need. You sell your invoices to a third party (a factor) and let them do the rest. With the advance from the invoice, you can get back to running your business instead of chasing down customers and aging invoices.
A factor is a third party that will be able to advance you most of the money from an aging invoice and collect on it from your customers. They can also provide you with guidance and financial advice throughout the process. When you work with a factor, you can boost your productivity instead of worrying about your outstanding receivables.
How Invoice Factoring Works
Now that you know what factoring is and a bit of its history, you probably want to know how exactly it works! One of the biggest upsides of using invoice factoring is that the money you’re receiving was already yours to begin with; factoring is just an alternative way of helping you get the cash you need.
It can be difficult — especially if your customers are friends or acquaintances — to constantly follow up and chase after customers to get paid. But a factor can give you cash upfront so you get the funding you need right away.
A factor can advance you 80-90% of your invoice’s face value once you sell it, which can be a huge boost to your cash flow at your business and get things moving again. Factoring can help businesses through beginning-of-the-year droughts in accounts receivable, or help growing companies make immediate changes to their processes so they can continue on their upward trajectory.
Businesses across a variety of industries can use invoice factoring. It’s actually used across the globe, and it’s a proven method of alternative business financing. Whatever your needs are, invoice factoring is another way of ensuring you’re not leaving money on the table.
Invoice Factoring vs. Other Financing
With a loan from a bank, you’ll need to first apply and go through an approval process before you ever see a cent. Even if you’re approved, you still only have access to a finite amount of capital that you’ll still have to pay back (a loan is a loan, after all). Even if you do get approved for the loan, you might not get approved for as much as you actually need, so it’s not quite a stopgap measure or a solution for your cash-flow problems.
With factoring, you don’t need to worry about a 10-year payback period or a credit check. The money the factor advances you is technically your money in the first place, and the fee a factor might charge for their services is far less than the interest you could be stuck with for a conventional bank loan.
Frequently Asked Questions
Do you have factoring questions? We have the answers you’re looking for. If you’re unsure if factoring is right for you, read over our FAQs to get more information.
Can I get started with a factor right away?
After you apply to work with a factor, your information will be reviewed and you should hear back within a few business days. Once the factor knows more about your situation and your needs, they’ll know how they can best help you.
What do I need to apply for factoring?
We recommend you have all of your most important documents on hand when you apply for factoring. This includes your driver’s license, Social Security number, legal form of your business, the state of formation, articles of incorporation and your business tax I.D.
You’ll also need financial documents that account for at least two years:
- Balance sheets
- Profit and loss (P&L) statements
- Corporate tax returns
- Three months of bank statements
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Won’t my customers think my business is in trouble if I use factoring?
Not necessarily. Many growing businesses use invoice factoring as a way to finance their immediate needs. For many companies, an accounts payable department handles invoices anyway, so the CEO or head of the business may not even be involved in the process at all.
Why Choose Factoring for Your Small Business?
Constantly chasing after customers to pay can be exhausting. Factoring is one of the best methods of alternative financing to get the cash you need for your daily business operations. But what are some other benefits of working with a factor?
Invoice factoring isn’t a form of financing for struggling or distressed businesses. Factoring is a way for any growing company to get paid quickly. Each business situation is different, but at the end of the day, this kind of alternative financing is versatile and makes sure you can get what you need for your company when you need it.
What Other Value Can a Factor Provide You?
When you work with a trusted and professional factor, you can rest easy that you’re working with a financial advisor that has your business’s best interests in mind. Often, a factor can also help guide you through tough or unexpected situations, especially when it’s your funding that’s on the line.
In the case of the unexpected, being prepared with a factor you can trust can make a huge difference for your business. At ei Funding, for example, we can also help with debt consolidation and P.O. financing.
Invoice factoring is a proven method of financing for your business. It’s a simple and easy way to get the funds you need right away without a bank or a credit card. And unlike going it alone, you won’t be stuck paying exorbitant fees just to get your money.
When you work with a seasoned, experienced factor, you don’t just have a service provider — you have a financial advisor and partner on your side. A factor can help you make sense of your business’s A/R and help you turn yesterday’s aging invoices into funds today.