Running a small business can often feel like living hand-to-mouth. Every penny you make is needed to service your customers, pay your employees and cover overhead. If you have to wait 30 days or more for your customers to pay their invoices you might find yourself unable to meet these current financial needs. And forget growing your business – that is nearly impossible if you don’t have access to a regular and ongoing flow of cash.
Fortunately, there is a simple solution to small businesses’ cash flow needs that does not require you to go through the complicated and risky loan process – invoice factoring.
How Does Invoice Factoring Work?
Ordinarily, when a business provides a good or service to a customer, it issues an invoice for payment that does not have to be paid immediately. Most invoices come due in 30 or 60 days, during which the business does not have access to the money it is owed. If a business engages in invoice factoring, it sells its outstanding invoices to a third party buyer at a discount off the face amount. The business gets immediate access to cash and the buyer now has the job of waiting for the invoice to be paid and taking on the expense and effort of collecting on the invoice if the customer fails to pay.
What Are the Advantages of Invoice Factoring?
For a small business, invoice factoring can make a big difference. If you need a regular and steady flow of cash to help purchase new equipment, expand your marketing efforts or increase your space, consider the advantages of invoice factoring:
- When you sell your invoices, you get the money immediately; no more waiting for your customers to pay;
- Depending on the volume of invoices you have to sell and their face amount, many buyers will charge only a small percentage of the value of the invoice, which means you will get most of the money you are owed;
After you sell an invoice, you do not have to worry about the customer defaulting– that risk is now borne by the buyer.
You do not have to qualify to sell your invoices like you do for a loan, and you do not have to pay interest. Invoice factoring is the simple sale of an asset for immediate cash.
If most of your individual invoices are for small amounts, you can avoid some of the detailed bookkeeping required to follow each individual sale through to payment. Selling many small invoices as a group will give you a lump sum of cash at once without having to wait weeks or months for each individual payment to come due.