Invoice factoring is a service that can give your business an influx of cash based on the work that you have already done. This is becoming a more talked about subject because it allows a business to get the cash they need without having to take out a loan.

Understanding what factoring is, how it works, and why it’s different will help you understand why businesses are turning to factoring services.

What Is Factoring Your Invoice

Factoring an invoice is a service that is provided to businesses to collect their unpaid invoices. A factoring company will take over the invoice and pay a company anywhere from 80-90% of the invoice total until the invoice is paid in full. Once all money is collected, then that company will pay the business the additional cash, less the fee that was agreed upon.

Factoring companies allow a business to gain additional cash flow right away without taking out any unneeded loans against the business. The immediate cash flow can help a business grow or help fill additional orders. Each business is different, but factoring your invoices can give you the cash flow you need.

How It Works

With a factoring service, you collect a significant percentage of the money before your customer owes the bill. For example, if you invoice a customer for $1000.00 and they have 30 days to pay the bill, then a factoring company will give you 80-95% of that bill right away.

This allows you to have an influx of cash on the bill that is owed, but you do not receive all the money right away. You also have to make sure that you can prove that all invoiced services have been performed.

You will see your influx of cash from the factoring company and receive $800.00 right away. However, because you are factoring the invoice, once the customer pays the invoice, you will only receive the additional money minus the fee. So if your fee is 3% per month then you will receive an additional payment of $170.00.

Although this is a simple example of how a factoring service works, all the fees and regulations will be itemized in your agreement. You can also owe additional charges such as new customer fees, monthly fees, and renewal fees. These are all costs that you need to consider when using a factoring service.

Why It’s Different From A Loan

Invoice factoring is much different from a loan because this is money that you have already earned through goods and services. Factoring companies are providing you with an advance on the money and only taking the fee that was agreed upon. There is no paying the money back to the company because they are not providing you with a loan of any sort.

You are selling your invoice for collection to a factoring company for a percentage upfront, and you are receiving an additional percentage on the back end. Due to selling your invoice you are not putting up any collateral because the work has been done.

Is It Worth It

Selling invoices to a company is a decision that your business will have to make based on your cash flow and what invoices you can retain. The most significant advantage is that you are given an instant influx of cash; however, with fees and a percentage of the business, you may find it is not worth it.

However, these fees and percentages could be worth it to your business because they can keep from staffing and additional position or allow you to dedicate your time to other places. This is why factoring your invoice is becoming such a hot topic.