invoice factoring for small business

A Guide to Invoice Factoring For Small Business

Have you considered using invoice factoring for a small business?

Invoice factoring is a service where you sell your invoices to a factoring company. This company pays you a lump sum of cash. They’ll then collect the invoice amounts from your vendors.

You sell these invoices at a discount, so your balance won’t be the exact amount listed on your invoice.

So why should you consider small business invoice factoring? How does the whole process work?

Here’s what you need to know.

Fast Cash

Why would you need to consider invoice factoring at all? The main reason is if you need fast cash that your vendors can’t provide.

For example, let’s suppose you have to pay a large bill in 15 days. Your vendors might say you’ll have to wait 30 days to receive your invoice payment. 

In such a case, you’ll want to turn to an invoice factoring service. It’s a faster way to get cash than taking a loan. It also doesn’t have the obligation for returning the money as a loan does.

Factoring Fees

The factoring fee always depends on the amount and the company you choose. However, one can expect fees to range between 1% and 5%.

Let’s say you receive invoices that add up to $1,000. If the fee is at 3%, you’ll have $30 deducted from this amount. This makes the amount owed $9,970.

At first, you’ll generally receive 85% of the amount owed. This means you’ll get paid $8,474.50 upfront. Once the factoring company receives the payments from your vendors, you’ll receive the remaining 12%.

If your vendor never makes their payment, you might not receive the remaining amount. You’d have to buy back this remaining amount and might pay a higher factoring fee.

Invoice Factoring for a Small Business

So, why does a small business specifically need invoice factoring?

As a small business, you will likely have a low emergency fund that you can depend on. You also need to depend on a regular cash flow to pay bills, debts, and emergencies.

As such, your business can fail if you exhaust your emergency fund or decrease your cash flow. An invoice factoring service ensures that you can get fast cash when you need it.

Apart from the requirement to return the money, invoice factoring has other advantages over business loans.

An invoice factoring service is often less discriminatory compared to banks. They’re meant to serve small businesses that don’t have a lot of credibility.

They also don’t require you to put up any collateral that a bank or other money lending service would require. 

Get Your Cash Today

Now that you know the benefits of invoice factoring for a small business, you can use it for your company.

If you have regular bills, consider it if your cash flow isn’t constant. You want to also make sure you work with vendors who are trustworthy.

While one shouldn’t become dependent on invoice factoring, it’s a service that can help prevent a business from failing. As such, you should share this guide with your fellow entrepreneurs.

You can find more great business tips on our website!