What is invoice factoring and when should it be used?

Everything you need to know about invoice factoring.

Invoice factoring is a sort of short-term loan for small businesses needing an immediate cash infusion. It’s a type of debtor finance where a business sells its invoices to a third-party factoring company. The factoring company pays the business some of the invoiced amount immediately and collects payment directly from customers. In the short term, invoice factoring helps improve a company’s cash flow and revenue stability. This can be a useful strategy to employ in the right circumstances. Learn if invoice factoring is right for you.

How invoice factoring works.

Invoice factoring involves your company essentially sending a copy of every invoice to a factoring company. The factoring company then lends you a percentage of that invoice. This “advance” on your invoices allows you to re-invest funds into your future supply and fuel more growth. In order to execute this relationship, your company must enter into an agreement with a factoring company that explicitly outlines these terms, including the advanced rate (the percentage of the claim amount you receive from the factor), factoring fees, and payment deadlines. Be sure to do your research before entering into a factoring agreement.

When to factor.

If your business is expanding quickly, you might run into a problem where you can’t get money in fast enough to pay for the material you need for your products. This is a good problem to have, but it can make for a sticky short-term financial situation. Consider factoring if your business is new and growing rapidly. It might help give you needed short-term assets so you can pay for your future supplies while you are getting on more secure financial ground.