Benefits of Invoice Factoring

Hand with an invoice and a calculator

July 2021

Most people are unaware of invoice factoring and the benefits it can have for a small business in need of working capital. Benefits include increasing cash flow and freeing up resources to allow for more time to focus on the business. We are hoping that this post will shine a light on what invoice factoring is and how it can potentially help your business.

What is Invoice Factoring?

Invoice factoring is when a company sells their accounts receivables (A/R) at a discount to a factoring company.  Why would anyone do this? Well, to be blunt, it helps cash poor businesses that are waiting for their customers to pay them back after the job is complete and the invoices have been issued.

Now that we have somewhat explained the definition of invoice factoring, lets explain how it works. In this scenario there are only three parties involved, Company ABC (providing the service), Factor 123 (proving the invoice factoring), and Debtor XYZ. Company ABC drives products for Debtor XYZ across the country from New York to Washington state. Company ABC then invoices Debtor XYZ $1000 for that service. Our debtor historically takes 30 days to pay back all their invoice, but Company ABC needs the money now to pay their employees. The company goes to Factor 123 to get their money to pay their employees. Factor 123 advances the company 80% of the invoice ($800) and will give them the rest of the balance ($180) minus their fees (2% or $20) once Debtor XYZ pays the invoice.  This allows for Company ABC to pay their employees on time without having to wait for their debtor to pay them back in a month.

Benefits of Invoice factoring

Invoice factoring allows for companies to meet their payment deadlines, this could include payroll or fulfilling new orders, as seen in the example above.  This way of financing also reduces the time and resources that you would use trying to collect the A/R by the factoring company doing it for you. Not only do you not have to track down your debtors, but you can also offer longer pay periods to larger customers to help increase your sales. Since you are getting paid right away you can pay back your suppliers a lot faster than you did before.

Will you try it? We are optimistic you will! Hopefully, this post helped you learn more about invoice factoring.  We’re always available for a discussion to determine if factoring is a good financing option for your business. If you are interested in factoring with us, please hit the apply now button or give us a call at 810-229-2601.