What Is Invoice Financing? A Step by Step Guide
When you’re running a business, cash flow can be a serious issue. If you’re waiting for clients to pay their invoices, you may have cash flowing out faster than it is coming in.
Fortunately, there are ways to access the money that is owed to your business through invoice factoring. Here we will discuss what it means to factor invoices and when it makes sense for small businesses to use this type of financing option.
What is invoice factoring?
Invoice factoring is a way to get cash for your invoices. You can use this money to pay off debts or expand your business.
It’s not debt, but rather an advance on the future income you will receive from the sales of your company’s goods and services.
The benefits of invoice factoring
Invoice factoring can help you get cash flow without having to sell your business.
If you’re not a seller, and don’t have access to capital from other sources, invoice factoring may be the most efficient way for you to get funding. It’s also an option if you want to avoid borrowing money from a bank or other lender.
Invoice factoring is similar in some ways to selling assets such as equipment or machinery — but it doesn’t involve any liquidation of those assets or inventory at all. Instead, this funding source allows businesses with strong credit histories and good payment histories to raise funds against outstanding invoices — and receive their cash up front instead of waiting for payment from their customers (or worse: never getting paid at all).
How to find the right factor
- Make sure the factor has a good reputation. You should be able to find references and testimonials from companies that have used their services in the past.
- Look at the factor’s track record, including how long they’ve been in business, what types of businesses they work with, and how long they’ve worked with those types of businesses.
- Check into the financial health of your potential factoring company; this includes looking at their cash flow, profitability, debt load and equity ratio (the amount of money owed versus their assets).
- Ensure that your potential factor has both modern technology as well as customer service staff available 24/7 to help you if anything goes wrong.
When it’s time to factor your invoices
Invoice factoring is a great option for businesses that need cash and are in need of quick funding.
- When you need cash: Companies often factor invoices when they need to raise capital to launch or expand their business.
- When your business is growing: As companies grow, invoice factoring becomes more attractive because the investment required in receivables can rise dramatically due to larger volumes of sales from new customers and higher levels of debt being owed to suppliers, partners, employees and others.
- When you need to expand: Invoice factoring provides an affordable source of capital for growing companies looking to invest in equipment purchases or other areas where cash flow may be tight due to seasonal fluctuations in sales activity.
Invoice factoring is an excellent way to get needed cash flow into a business.
Invoice factoring is an excellent way to get needed cash flow into a business. It is an effective way to raise capital without having to give up your receivables or assets.
It can be a viable option for small businesses that are in need of funding but don’t want to sell equity or lose control of their company while they’re still growing.
Invoice factoring companies buy invoices at a discount, allowing you to receive immediate payment on past due invoices at less than face value and allowing your customers more time to pay.
Invoice factoring can be a great tool to help you keep your business running — but only when it’s the right choice and you have the right partner.
If you think it might be time to start factoring, then do some research and find out what options are available to you.
Here at Financely, we’re always happy to answer your questions about how our invoice factoring service can help your business grow. Contact us today for more information.