Invoice factoring is a financing method that lets businesses sell their invoices to a third-party factoring company. The company gives the business a portion of the invoice amount upfront and collects the payments from customers. Invoice factoring is typically best for companies that generate invoices for other businesses and need quick funding with flexible qualification requirements.
Advantages of Invoice Factoring:
You get immediate cash flow. You can sometimes get funded on the same day to keep your business running smoothly. Invoice factoring can help you maintain your cash flow without having to wait for invoices to be paid each month.
You have a better chance of being approved for this type of financing than more traditional business loans. Collateral and credit score aren’t significant factors in determining your eligibility. The invoices themselves are the collateral.
Typically, lenders will want to look at your customer payment history. If you have bad credit, invoice factoring can still be an option for you. Newer businesses can also have a better chance of qualifying for this type of financing.
Invoice factoring can save you time since you will essentially be outsourcing the job of keeping collecting invoices. It might also give you a better relationship with your customers since you’re no longer hounding them for money.
Disadvantages:
To be eligible for invoice factoring, the factoring company will look at your customers’ payment history. If they have a history of not paying on time, they’ll be less likely to take on your invoices because of the risk.
It can be costly. Typically, a factoring company will charge you 1-5% of the total invoice amount in fees. You must decide if this solution for immediate cash is worth the loss.
Invoice factoring doesn’t work for all business types. You need to have invoices to convert them into cash.
Factoring companies might also try to get you to commit to a more extended period. You should evaluate if faster payments outweigh the commitment to a factor.
You’ll be responsible for any unpaid invoices if you choose recourse factoring. This can be avoided, however, if you work with a non-recourse factoring service. With non-recourse factoring, the factoring company will assume the loss if a customer fails to pay.
There are plenty of alternatives to invoice factoring if this is not the right solution for you. Alternatives, for example, include a business line of credit, merchant cash advance, and short-term loans. You can get access to all of these options and more at First Union Lending.
Choose First Union Lending
First Union Lending offers numerous financing programs designed with small businesses in mind. Our business loans are fast and flexible, with financing options ranging from $5,000 to 2 million dollars.
Call today to learn more about our various financing solutions to help your business grow and become successful.