Invoice factoring is a tool many businesses, small and large, use to get their outstanding invoices paid much faster than waiting on their clients to pay in the normal course of business. When you sell your invoices to a factoring company, you’ll immediately receive up to 90% of the invoice amount, while the factoring company will wait to collect the full amount from your client and return the percentage withheld less the associated factoring fees. Invoice factoring is different from traditional loans in that it offers more benefits to you, the business owner.
Short Term Benefits of Invoice Factoring
Eliminate Waiting Time
The most obvious benefit of invoice factoring is that it provides you with immediate cash for your business. Sometimes businesses simply aren’t in a position to wait 30 to 90 days, or more, for their clients to pay. By utilizing a factoring company, you can eliminate the waiting time and get the funds your company needs right away.
Increased Chance of Approval
Businesses are much more likely to get approved for factoring than they are for a line of credit from their local bank. Banks focus on personal credit scores and shy away from small or new businesses or provide lower credit limits than necessary to adequately fund operations on an ongoing basis. Unlike banks, factoring companies aren’t concerned with your credit score, time in business, business size, or loan history. Instead, they focus on the strength of your customers’ creditworthiness.
No Collateral Requirement
Collateral is not a significant concern of factoring companies since the invoices themselves serve as collateral.
Affordable Fees
Perhaps you’ve looked into invoice factoring in the past but felt it cost too much. In the simplest of comparisons, the cost of invoice factoring is no more costly than accepting credit card payments, so would you allow your clients to pay you via credit card if they paid you immediately? As factoring rates have declined over the last decade, invoice factoring is as affordable now as it has ever been.
Long Term Benefits of Invoice Factoring
The Convenience of Outsourcing Your Collections
Next to the benefit of receiving immediate cash, adding a dedicated back office that comes from invoice factoring is the biggest advantage you will gain. Allowing a factoring company to handle collections for your business will free up valuable time that you could spend on growing your business.
Improved Cash Flow and Working Capital
Invoice factoring provides immediate help with cash flow management which will benefit your business in the long term by allowing you to pay your recurring operating expenses like payroll taxes, insurance, and other bills in a timely manner that will help ensure business continuity. Also, having an established relationship with a factoring company allows you to be better prepared for emergencies that may arise in the future, as factoring companies are much more swift and nimble in their ability to respond.
Better Client Relationships
By outsourcing the collection process, you get to focus on fostering relationships with your clients without the need to discuss payment of outstanding invoices. Additionally, the increased and consistent cash flow from invoice factoring will allow you to invest in additional or more efficient equipment, so you meet the growing demands of your client base.
Increasable Credit Line
The factoring company you choose will provide you with a credit line that defines the maximum amount of outstanding invoices you can sell at any one time. In contrast to a bank line of credit, your credit line is limited only by the amount of invoices your business can generate. Because factoring companies are willing to increase your credit line as fast and as often as your company grows, invoice factoring is particularly beneficial for fast-growing companies that need financing to keep up with growing expenses.
Final Thoughts
While a factoring company may occasionally require your help when trying to collect, they’ll do most of the back-office work for you. That said, they won’t operate in a collection agency fashion as a reliable factoring company will always act in your best interest to ensure that you won’t lose work due to their efforts.
TXP Capital is a West Texas-based company that specializes in invoice factoring. Contact us today to learn more.
