What You Need to Know About Business Invoice Factoring

by | Apr 15, 2016 | Finance And Investment

Business invoice factoring is a great way of quickly deepening your pockets when you’re experiencing cash flow issues. Despite the fact that it has been used by companies in need of a quick cash injection for centuries, invoice factoring is a surprisingly uncommon practice among businesses, primarily because many of them simply don’t want to lose control over their accounts. If you’re experiencing cash flow issues and the bank and credit system are taking too long to be even remotely efficient, invoice factoring might just be the best course of action for you to take. It doesn’t take long for the factoring company to set up an account for you – usually a week or less – and it can advance you your funds within an hour of receiving your invoices. As a general rule, factoring companies look at things like your customers’ payment trends, your sales volume and the climate of your industry before approving your account.

Invoice Factoring Versus a Bank Loan

Unlike a bank loan, where you’re using the banks money to pay for things until you can pay the bank back, you’re only really borrowing from yourself when you use business invoice factoring. The money the factoring company advances you when you sell them an invoice is, when you think about it, yours – it just hasn’t been paid to you yet. Similarly, banks tend to focus on your business’ financial history, cash flow and ability to repay the loan, for which you assume the entirety of responsibility. With invoice factoring, however, the factoring company takes on all the financial risk of your accounts receivable, focusing its attention on your customers’ credit. At the end of the day, your customers’ paying habits determine your invoices’ value, just as they determine the value of your business.

How It Affects Your Customers

Some businesses are wary of invoice factoring because the factoring company assumes responsibility for making sure the invoice is paid. These risks compromising your relationship with your valuable customers, which, particularly if you’re operating as a small business, is all you have to trade on. That’s a valid concern, as you need your customers’ faith to continue operating, but you needn’t worry about how factoring companies will treat your customers. These companies aren’t debt collectors, and tend not to take on invoices from customers who have a history of not paying theirbills. Realistically, the factoring company won’t get paid unless it works with businesses that have reliable customers, so it won’t risk alienating your customer base as doing so prevents it from getting paid.

Factoring companies have to be completely transparent with their practices in order to stay in business, but keep their communication with your customers to a minimum in order to protect your relationship with them.

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