How Does Invoice Factoring Work?

If your startup is in need of an infusion of capital, you may need to look for a lender that thinks outside-of-the-box for business loans. Traditional financing may carry a long list of requirements for new businesses that are hard to meet. With alternative methods, it may be possible to get approved even if you’ve been in business for less than two years or don’t have the best credit yet. One awesome alternative is called invoice factoring. Here’s everything you need to know about this popular financing method:

What Is Invoice Factoring?

Invoice factoring is a type of cash advance. It’s considered alternative financing, but it doesn’t really involve a loan of any kind. Instead, this option lets you trade unpaid invoices for instant capital. There are several methods available, including spot factoring with one invoice at a time and high-volume factoring for an entire accounts receivables department.

How Does Factoring Work?

The process for this type of financing is simple and straightforward. You need three basic things to get started: customers who pay on time, unpaid invoices to use for the advance and a good relationship with a trustworthy factor. The factor is the financing company that extends your business the necessary capital.

When you’re ready to get started, you contact the factor and provide a qualified invoice. In a few hours or a day or two, the factor deposits most of the invoice’s value directly in your bank account. A little later, after your customers pay the invoice, you get the remaining portion of capital, minus a small fee or percentage that goes to the factor. This percentage is how the factor makes a profit.

In other words, invoice factoring basically involves getting paid right away instead of waiting a month or more for your customers to pay. Normally, the difference may not be a huge deal, but when you need capital urgently, getting financing in 24-48 hours is a lot better than waiting 30 days or more.

What Are the Advantages of Invoice Factoring?

There are many reasons why this option is so popular among small and large businesses alike. First, a low credit score generally isn’t a problem. As long as you have customers who consistently pay on time, qualifying is easy. Also, getting cash upfront can be helpful for emergencies. If you need to make payroll or pay taxes, this option is amazing.

This type of advance is especially helpful for promoting solid cash flow. You don’t have to worry about any kind of debt because you’re using your own financial assets. If business slows down, you can turn to invoice financing to get the capital you need right away.

SHARE IT: LinkedIn