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what is invoice factoring

What is Invoice Factoring?

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Invoice factoring is a business finance tool that gives an organization nearly immediate access to money their customers owe them without waiting 30, 60, 90 days – or even longer – for the invoices to be paid.

Instead of waiting for customers to pay, the business can factor an invoice with a factoring company for a small fee (called a factoring fee) and receive an immediate advance, which could be up to 95 percent (or even more) of the invoice amount.

Why do companies factor invoices?

Though the need for expedited or more consistent cash flow is the reason most companies factor invoices, some of the other common reasons factoring clients cite include:

  • Need to unlock working capital to fuel business growth
  • Working capital can be leveraged for better terms with suppliers
  • Customer accounts with generous terms, often 30-90 days
  • Need working capital to take on larger accounts or big orders
  • Slow-paying customers
  • More consistent cash flow
  • Better ability to meet operating expenses and payroll
  • Capital expenditures like equipment purchases, repairs, renovation, or expansion

The practice of invoice factoring is centuries old and has played an important role in business finance. Any organization of any size that provides goods or services to other businesses, government agencies, retailers, or other commercial organizations on payment terms may be able to factor receivables to improve cash flow and unlock working capital.

What type of businesses factor invoices?

Factoring clients come from many different industries where invoice factoring is commonly used to expedite cash flow, including:

  • Staffing and temporary employment agencies (security services, nursing, etc.)
  • Business consulting and B2B business services
  • Trucking, transportation, logistics
  • Supply chain distributors and manufacturers
  • Vendors selling through Costco, Walmart, and other mass retailers
  • Textile, clothing, accessories, and other wholesalers
  • Oil and gas (and all gas and oil field contractors)
  • Energy and utilities companies and contractors – and others

Nearly any type of company that invoices customers for payment or waits more than 15 days or more to get paid after completing delivery of goods or fulfillment of services might be able to improve cash flow immediately by factoring invoices.

How does the invoice factoring process work?

Invoices factored are typically funded within 1-2 business days – up to 95 percent (or even more) of the face value of the invoice, with the remainder placed in reserve as a holdback, pending customer payment of the invoice.

As an example, if a businesses completed delivery of goods or services to a customer and generated an $18,000 invoice, with net 30 (or even longer) terms, they could unlock most of that working capital within hours instead of waiting weeks or even months on payment.

Assuming a factoring fee of 3% and an advance rate of 95%, here’s how it would work:

Invoice Factoring Process Overview
Day 1 – Generate a $18,000 client invoice and factor it
 – 24-48 hours Receive an advance of $17,100 (95%)
Factoring company earns $540 (3% factoring fee)
Day 30+ Receives the $360 holdback (2% of the invoice amount) after the invoice is paid

What are the benefits of invoice factoring?

Faster cash flow!

Businesses that want to expedite payment of accounts receivable invoices can turn to a receivables factoring company. Instead of waiting on customer payments, they can factor a customer invoice on the same day it is generated and receive an advance of up to 95 percent of the face amount of the invoice right away.

Advance rates may be even higher, and factoring fees even lower for larger invoices or for companies who factor on a regular basis and receive a volume discount.

Factoring receivables enables you, a business owner, to focus on growing your business rather than chasing invoices or performing collections. They gain almost immediate access to working capital by speeding up cash flow so they can reinvest in their company much more quickly.

Factoring receivables could also be the key to positioning your business to be able to take advantage of emerging opportunities.

Organizations that factor invoices expedite cash flow, which means they have more flexibility to meet operational expenses. They have the flexibility to extend more generous payment terms to their customers as a competitive advantage and can reinvest working capital in their business more quickly in order to expand, service larger accounts, or take on new customers.

There are also additional benefits for businesses that choose non-recourse invoice factoring over factoring with full recourse.

Non-recourse factoring is less common in today’s economy because non-recourse factors assume the credit risk for the invoices they purchase. When you factor invoices with a non-recourse factoring company, you may be able to completely eliminate financial risk from bad debt. Find out more about factoring invoices with recourse vs. non-recourse factoring companies.

Speed up cash flow and grow your business faster by factoring invoices instead of waiting 30, 60, 90 days or longer for customers to pay.

Since we have competitive rates and fees, working with us will not cost your business more, but it could help you get a better factoring agreement. You want to work with an invoice factoring company that goes from approval to funding quickly and looks for reasons to say “Yes!” when you submit invoices for factoring. Our factoring services offer low fees, high advances, and flexible terms, such as:

  • No long-term contracts
  • No monthly minimums (you choose when and how much to factor)
  • Retain control of billing your customers, or let the factoring company do the work
  • Non-recourse factoring (the factoring company assumes the credit risk)
  • Spot factoring
  • Micro-factoring
  • Small invoices welcome!
  • Credit checks to help you vet new customers
  • No application or due diligence fees
  • No hidden fees
  • Fast approvals and funding

Most importantly, we promise a high level of customer service to our factoring clients. We want you to work with a financing partner who understands your preferences and unique business needs, saving time and reducing the stress of managing receivables. Take the next step and request a free, no-obligation factoring quote to determine if this business finance tool could help your company grow faster.

Overview of Common Business Financial Statements

Understanding Common Business Financial Statements

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Improve your ability to understand and interpret the most common business financial statements needed to run your organization.

Financial Literacy is Essential for Running a Thriving Business

PreferredCFO.com cites several business finance challenges being at the heart of why young businesses failed, with financial literacy coming in on the top of the list:

  • 82% – Didn’t understand cash flow or had poor cash flow management skills
  • 79% – Didn’t have adequate working capital at the outset
  • 78% – Didn’t have an effective or well-developed business plan
  • 77% – Didn’t price products or services properly
  • 73% – Didn’t predict sales or costs accurately
  • 70% – Didn’t know what to do to succeed and failed to seek help from those who did

It’s nearly impossible to overstate the importance of financial literacy. While a business owner can learn along the way, having a strong understanding of the financial needs and performance of their company can help them avoid making some of the costly mistakes that can hurt an organization.

This need only grows over time, from knowing how much money you need to start up, to understanding when it’s time to make changes in your business. Paying close attention to the common business financial statements produced each month, quarter or year can give you invaluable insights into sales trends, vendor costs, payroll and other business expenses so that you can take action before a small problem escalates.

Overview of Common Business Financial Statements

What is a Balance Sheet?

The balance sheet shows an organization’s assets, liabilities and net worth. The organization’s assets must be equal to the sum of its liabilities (debts) plus equity in order to balance.

Assets are items an organization owns that have value; meaning, they can be sold or leveraged to make services or products which can be sold.

Liabilities are debts owed by the business to another organization or individual.

Net worth, or equity, is what an organization would have if all assets were sold and all liabilities satisfied. An organization’s net worth belongs to its owner and/or any and all shareholders.

What is an Income Statement?

The income statement shows how much revenue, or income, an organization earned over a specific time period (often over a quarter or year). And it also shows the costs and expenses attributed to earning that revenue.

The commonly used phrase, “the bottom line…” is derived from the actual bottom line of the income statement because it shows an organization’s net income or net loss after costs and expenses are deducted.

What is a Cash Flow Statement?

While income statements have a bottom line of net earnings or loss for a given period, cash flow statements show the movement of cash in and out of an organization.

Understanding the flow of cash going in and out of your business is important because you need to know whether you have enough money coming in to cover operating and capital expenses. It can also help show you where your cash is coming from (or whether activities, such as operating activities) are not generating enough cash to cover operating expenses.

So what if you do have slow cash flow? Apart from growing your business or increasing sales, another way to speed up cash flow is to factor customer invoices instead of chasing down payments. Some companies do this on an on-going basis until they have grown to the point that incoming revenue from sales more than cover business expenses. Other companies choose to factor invoices only occasionally or to spot-factor invoices in order to free up working capital to meet payroll, invest in emerging growth opportunities, pay vendors more quickly for fast-pay discounts, and so on.

The more you understand your organization’s cash flow, the better you can leverage financial tools that expedite working capital. This can help you run your business more effectively and efficiently, or put you in a position to grow your company faster.

Why Understanding Common Business Financial Statements is Important

In business, chances are that sooner or later you will need to be able to read and interpret common financial statements in order to make good business decisions for your organization and avoid costly mistakes.

A better understanding of the financial position of your business can help you determine whether, and how, business financing options like invoice factoring could provide you with expedited working capital or a more consistent flow of cash so that you can focus on growing your business to the next level.