Do you have unpaid customer invoices but need financing to help run your business? Consider looking into invoice factoring. With invoice factoring you can turn those unpaid invoices into cash. This type of financing is popular among wholesalers, construction, manufacturing, and printing companies. Here is what you need to know about invoice factoring and how it can help your small business.
Invoice factoring is not a loan, but it does help you get the cash that you need for your business. You can sell all your unpaid invoices at a discount to a third-party factoring company in exchange for cash. The company will then give you 85% to 95% of the invoice total upfront and hold a percentage of the invoice value until the customer has paid the invoice. Once they pay, you will get the reserved money without a factoring fee.
If your customer fails to pay the invoice, it will fall under recourse factoring or non-recourse factoring. Non-recourse factoring involves the factoring company assuming the total risk for the invoice. If the customer does not pay, you will not be held responsible. With recourse financing, your company will be liable for unpaid invoices. Most factoring agreements follow the recourse factoring model.
The terms invoice factoring and invoice financing may be used interchangeably but they are not the same. Invoice financing gives you the ability to borrow against outstanding accounts. When the customer pays you, you will repay the lender upon value and fees or interest. On average, processing fees for invoice financing are lower than invoice factoring. On average it is 1%-3% a month rather than 2%-5%.
Invoice factoring is not best for all businesses so there are some important questions you need to ask yourself to see if it is the right fit for your business.
Invoice factoring is an attractive choice for many small business owners because the third-party factoring company takes responsibility of the collections which gives you more time to run your business. Although it is not cheap, it is great if you need access to cash quickly to pay for payroll or materials. If you find that invoice factoring is not right for you, there are other options available like cash flow loans and small business loans.