Invoice Factoring – What Is It And What Are The Benefits?

Invoice factoring is a financing option that is made available to businesses with the aim of providing partial or full payment for their outstanding invoices. Originating as a concept from the moneylending industry, invoice factoring provides an alternative means for businesses to access capital by borrowing against their future receivables. Invoice factoring can be used to manage fluctuations in cash flow and generate additional revenue.

According to statistics released by the Office of Federal Financial Assistance, around 50% of small companies utilized some form of invoice financing during 2016, with venture-backed companies leading the way at 71%. This is perhaps due to the notable benefits invoice financing has over traditional bank financing. Some of the main benefits of invoice factoring include:

Speed and flexibility – Invoice factoring allows for a business to take advantage of their invoices, even if they're already paid for or settled. Invoice factoring removes any security interests on the part of the creditor and can be accessed quickly, usually within 1-2 days.

Assurance of payment – A key feature that makes invoice factoring stand out from other forms of financing is because it's a cash advance against future invoices. This means that, unlike a loan and unlike working capital line of credit, the financing is not dependent on seasonal or future business performance. This allows businesses to boost their cash flow immediately.

Cost – Invoice factoring is usually available at lower rates than other forms of financing and is secured against real invoices, which means that it's possible to benefit from lower interest rates over a longer repayment period. Plus, there are no setup costs or additional fees involved when choosing invoice factoring as your source of funding.

Timely liquidity – Invoice factoring provides for immediate access to cash because it's possible to use the funds straight away without waiting for an approval process or having to apply for a loan approval first.

No collateral required – Unlike other forms of financing, a business will not need to offer up collateral to receive an invoice factoring advance. This is a major benefit for small businesses who may not have any use for the collateral and can risk losing it if the business fails. With invoice factoring, there are no security interests provided by the client.

The primary downside of using invoice factoring is that your customer needs to pay on time in order for you to receive payment. However, this is an important aspect that shouldn't be overlooked, especially with invoices representing future revenue. If your customer fails to pay on time, then you won't receive payment.

Another disadvantage that is worth taking into account is the fact that invoice factoring will put you in a position of being accountable to your customer's invoice. This can be a consideration if the business has very strict payment terms. You're essentially responsible for making sure your customer pays on time, and that could damage your relationship with them.

Invoice Factoring: How It Works in 5 Easy Steps

What Is Invoice Factoring and How Does it Work? Invoice factoring offers businesses a way to receive payment faster than waiting for their invoices to be paid by customers. This means businesses have access to the cash they need immediately, without having to wait for their invoices to be paid first. Invoice factoring is also easy to understand and use because it's a non-recourse form of financing that provides a quick cash advance against your invoices. To get started, you'll need: Your invoice – Your business won't receive an invoice factoring advance until you have an invoice (or several invoices) that have yet to be paid by your customer. It's essential that the customer has not already paid their invoice before you begin the process of applying for an invoice factoring advance. Invoice factoring can only be used with invoices that are still unpaid.

Your client's bank details – You'll also need your customer's bank account details in order to make the payment transfer detailing your credit. This includes their account number, their bank name and the sort code. Once you have this information, it's easy to set up your online account with the bank so that it can be used for invoice factoring.

Your invoice factoring terms - Your Factoring Agreement will outline how much of your invoice is for interest and how much is for reimbursement. It's important that you make it clear which amount is being reimbursed in order to secure the right amount of finance from an invoice factoring provider.

How Do You Apply for Invoice Factoring? You apply through an online application form provided by one of the numerous companies who offer invoice factoring services. Most companies have standardised application forms, and these forms are used to collect the necessary information from your business in order to process the application. Most banks will require the following information before they can process an invoice factoring advance: Tax ID number – This identification number is issued by the IRS. It's required for businesses doing business in the United States of America.

Trade references – Information on your past experience of invoice factoring can help you secure a better deal with your Invoice Factoring Provider. If you've never engaged in invoice factoring before, it's best to use a reference with a trusted business or two that can provide feedback on your previous performance with this type of financing.

Financial standing – You'll need to provide details on your business's financial position in order for your invoice factoring provider to work out how much you can borrow.

What Are the Expenses Invoice Factoring? The Expenses Invoice Factoring are the fees that are normally charged by a business who decides to use invoice factoring as their source of funding. These expenses will vary depending on the size of your company and the level of financing required. What is a fee? A fee is simply a charge or amount that a business pays in order to make use of invoice factoring. It can be anything from a small fee for processing your application to a large fee that will cover a portion of the finance costs and interest for your advance. The company will take into account factors such as how long the invoice has been outstanding, and how many times it's been referred to them by your customer. There may be other factors that can increase or reduce the payment amount including: The invoice amount – Some invoice factoring terms are more beneficial than others.

Conclusion

Invoice factoring is an easy-to-understand form of financing that allows businesses to receive money immediately. It has no hidden costs and can help businesses gain access to much needed cash flow, without having to wait for their cash flow to improve. When used correctly, invoice factoring can make a real difference in the success of your business.

If you're interested in learning more about how you can use invoice factoring to maximise your business's growth potential, then why not get started by speaking with one of our team today? Contact us here or on 0207 923 8883 for more information on invoice factoring and the Invoicefactoring2u service.