What Is Invoice Factoring?
Invoice factoring allows small businesses to finance a cash advance on their accounts receivables. It’s different from a typical loan because you are accessing funds you have already earned.
Instead of having to wait weeks to get paid according to your invoice terms, you access the cash when you need it. And if you need a cash advance quickly, online invoice factoring takes only minutes to accomplish.
What Is the Factoring Process?
Invoice factoring isn’t complicated. As a business owner, you can sell your accounts receivables to a reputable financier called an invoice factoring company.
At this stage in the factoring process, the invoice factoring company advances you a cash percentage of the total value of your accounts receivables, generally between 70-90%.
When your customers pay their invoices, the factoring company pays you the balance minus their factor fee. In a nutshell, this is the invoice factoring process.
Your Responsibilities in the Factoring Process
As a responsible business owner, you’ll want to work with a qualified, well-reviewed factoring company. Here’s what to look for:
- How quickly they can fund your cash advance.
- How much they charge for their factor fee.
- The factoring company will want to examine your company’s financial stability, and they may want to verify how credit-worthy your customers are.
What Is Invoice Funding?
There is an alternative to invoice factoring called invoice funding (or invoice financing). Invoice funding is different from the factoring process because you still own your accounts receivables, but you use them as collateral, so the cash advance you receive is similar to a loan.
While this option can work for your business, remember that it is riskier because you’re still responsible for guaranteeing your accounts receivables.
What Are the Types of Invoice Factoring?
If you’re concerned about selling all of your accounts receivables to a factoring company, consider your options.
Spot Factoring means you sell a single invoice on a one-off basis with no long-term contract. You get a great deal of flexibility with spot invoice factoring, but you may face a higher factor fee.
Whole Ledger Factoring
With whole ledger factoring, you must sell your entire book of accounts receivables and sign a contract (this is also called full turn factoring). While some business owners are wary of this, you can expect to pay a lower factor fee.