Invoice factoring, unlike a business loan, involves an increase in cash by money that is already owed to you. How it works is that you sell your outstanding invoices to a reliable factoring company, which in return provides a lump sum. The amount can range from 70% to 90% of the invoice total, which is transferred to your bank account immediately to be used as working capital.
Invoice factoring is an excellent option for businesses that do not wish to wait 30-90 days for their customers to pay their dues. This alternative gives such companies the money they so desperately need in a matter of days.
Now the real question is, what are the short term and long term benefits of invoice factoring? By taking the benefits into account, a business can make an informed decision regarding whether they should take this route or not. Without further ado, let’s take a look at the benefits.
Short Term Benefits of Invoice Factoring
Immediate Influx of Cash
Business loans and other financing options can take months before they are approved. But that is not all; additional time may be required to process the funds you need. When compared to invoice factoring, it is too much of a hassle.
Invoice factoring allows you to have quick access to cash to keep your business running seamlessly. It is a viable option, especially if you have short term financing needs and can’t afford to wait for weeks or months for approvals, or for your customers to pay you back.
Improved Chances of Approval
One of the best things about invoice factoring is the fact that your loan history, credit score, and collateral are not significant factors for you to be considered eligible. Mostly, factoring companies are only concerned about how reliable your customers are at making their payments. It gives them an idea about the level of risk they are taking on.
Even though your credit score may not be all that great, invoice factoring is a great option to get you out of a fix.
No Collateral Required
As mentioned above, collateral is not a significant concern for invoice factoring. The invoices you provide act as collateral themselves. It means you do not have to worry about submitting your equipment, real estate, or any other asset for that matter, as collateral.
Affordable Factoring Fees
You will be pleased to know factoring fees have decreased considerably over the last few years. You can get advances up to 95% with prices as measly as 1.5%. Of course, the fees do vary from industry to industry, advance rates, number and volume of invoices, customer reliability, and their ability to pay back in a reasonable amount of time.
Long Term Benefits of Invoice Factoring
The Task can be Outsourced
There is no denying the fact that keeping track of your outstanding invoices and getting customers to pay up is a time-consuming endeavor, so why not let another company take care of this for you?
By letting another company take care of this for you, other aspects of the business can get more attention. You can take care of other responsibilities, while the factoring company you have opted for will set the terms for your customers and contact them accordingly for payments required.
Ongoing Cash Flow
What is interesting about invoice factoring is that it does not have to be a one-off. By building a relationship with your factoring company, your business will benefit in the long run. Never again will you have to worry about managing your cash flow, because you won’t have to wait for your invoices to be paid later on, and will get the money you need just in time.
Better Customer Relationships
Running a business is not entirely straightforward, and as a business owner, some responsibilities can be difficult and frustrating. Collecting debts is one of those tasks, but it can be handed over to your factoring company. This way, you will not have to worry about becoming the bad guy when the times to collect your debts. You will be able to maintain positive and strong relationships with your customers which could be long-lasting.
Line of Credit can be Increased as Required
Since your line of credit is related to your invoice balance, you can increase it, but only as long as your invoices increase at the same time. However, the quality of your clients needs to remain useful. It alone makes invoice factoring an excellent feature for companies that are working towards rapid growth because they need financing to keep up with their increasing expenses.
You Remain in Control
Just because you rely on a factoring company to deal with your customer payments does not mean they are your boss. You remain in control through and through, and only you can dictate how your funds get utilized.
Choosing the Right Factoring Company
Enough emphasis is done on the fact you will need to choose the right factoring company for your needs and requirements. Since businesses have different needs and requirements, not just any factoring company will do for you.
To choose the right factoring company, you will need to ask your potential factoring partner the following questions:
- How long have they been a part of the industry?
- What industries do they cater to?
- What are their rates and terms?
- Can they provide a list of references?
- How quickly can they set up an account for your business?
Considering the fact businesses can get, the cash they need to pay bills and whatnot without increasing their debt, it should not come as a surprise that businesses these days opt for factoring companies. If you want to improve your cash flow to increase sales, maintain a good credit rating, benefit from early discounts, meet payroll, and so on, then you should look into invoice factoring without thinking twice!