GreatFunds Logo

What Are the Benefits of Invoice Factoring?

Growing a B2B business that relies on customer invoices is a real challenge when your customers take their time fulfilling their financial obligations to your company. Many invoices have a payment window of thirty, sixty, or even ninety days.

Your company has to endure a financial hole in its working capital until the customer pays. 

For small and medium-sized businesses, these financial holes can be devastating and affect a company’s ability to function effectively.

Small and medium-sized businesses need upfront capital to—

  • Finance Payroll
  • Cover Operating Expenses
  • Pay Insurance Costs and Industry Specific Licensing Fees
  • Finance Machinery and Equipment
  • Resupply Inventory 

Most importantly, your business needs working capital to grow, and you can’t grow if the basics aren’t covered.

If your business is having trouble getting to that next level due to cash flow issues, you’ve likely started to explore alternative financing methods, such as B2B invoice factoring

In this post, Great Funds Factoring will explore how you can finance your business by selling your accounts receivable to a factoring company. Great Funds Factoring is a factoring company serving the entire United States, including Chicago. We help grow small and medium-sized B2B businesses like yours!

Discover what Great Funds Factoring can do for your business by filling out a credit application today!

What Are the Benefits of Invoice Factoring?

What is Invoice Factoring?

Invoice factoring, also known as accounts receivable financing, is a financial transaction where a business sells its A/R to a factoring company at a slight discount. The factoring company purchases a business’s invoices and receives upfront cash to meet its immediate financial obligations, such as payroll, operating expenses, and other expenses.

For many businesses, cash flow varies based on the season, market demand, and other less-predictable factors. A/R factoring is a convenient way to get paid upfront for your business’s work.

Unlike a bank loan, there is no need to pay the factoring company back—as long as the debtor (your customer) pays their invoice. All businesses need to do to begin invoice factoring is fill out a credit application with the factoring company.

Also, unlike a bank loan, it takes days—not weeks—to get approved and receive your funds.   

Benefits of Invoice Factoring

There are many reasons companies choose to sell their A/R to a factoring service for upfront cash. Let’s explore the most common reasons.

Improved Cash Flow Helps Your Business

Everyone could use more upfront cash. Businesses partner with factoring companies to cover the necessities mentioned earlier—payroll, insurance, maintenance, rent, etc. However, invoice factoring can help your business make the essential moves it needs to grow. 

Pursue Growth Opportunities

Having working capital allows a business to invest any surplus it has back into itself. For example, let’s say you wanted to open a second location to target a different region, or you wanted to invest in a marketing campaign to find new customers. 

However, your business never seemed to have enough working capital to make that investment soundly. Your current customers’ payments were unpredictable, leaving holes in your balance sheet and preventing your business’s growth.

Invoice factoring puts that working capital in your hands almost instantly—once the invoice is approved, the funds are transferred directly to your business account. Filling those holes in your balance sheet helps you take your business to the next level.  

Purchase New Equipment

Let’s say your business needs to upgrade its equipment, machinery, or IT infrastructure, but you are having trouble putting the funds together to make the purchase. Many of your customers take between thirty and sixty days to pay their invoices, making your cash flow unpredictable. 

Invoice factoring helps you achieve the working capital needed to purchase new equipment and improve your business’s operations. It adds a layer of financial stability—you know exactly how much you’ll receive and when.  

Reduce Operating Expenses With Upfront Cash

Many B2B businesses offer cash discounts for companies that pay for goods and services in cash. Invoice factoring improves your business’s cash flow, allowing your business to take advantage of cash discounts and save on operating expenses.

Improve Your Credit With Upfront Cash

Businesses that struggle with cash flow issues can suffer penalties on their credit ratings when they fail to meet their financial obligations on time. Pay your bills in cash received from invoice factoring and reduce the risk of overdrafting your business account or negatively impacting your credit rating.

Invoice Factoring Can Be More Favorable to Businesses Than Bank Loans

Invoice factoring has certain advantages that make it more appealing to small and medium-sized businesses than traditional bank loans. 

Better For Your Balance Sheet (Not an Expense)

Invoice factoring is not a loan, so it doesn’t appear as an expense on your balance sheet.

Get Working Capital Fast—No Lengthy Approval Periods

Bank loans can take weeks—and sometimes months—to get approved. There are lengthy processes that banks must perform before dispersing funds. This puts the cash your business needs in the present just out of reach. 

Easier Approval That a Business Loan

It is much easier to receive approval from a factoring company than from a bank. Banks will be much more scrutinous about your business’s credit score. They will also require collateral and extensive financial history.

As you’d imagine, this creates a headache for new companies with no substantial financial history. Banks may charge higher interest rates for newer businesses because of the risks involved.

With invoice factoring, there are no interest payments.

The Only Collateral is the Invoice Itself

To obtain a loan or a line of credit, businesses often have to put up collateral. Collateral can include anything from property and equipment to intellectual property or equity. Banks can seize these assets as collateral if you fail to pay your financial obligations. 

With invoice factoring, businesses sell their A/R to the factoring company. The only collateral is the invoice, which you’ll have to buy back if your customers do not pay.

Improve Your Customer Relationships

Many factoring companies take on the responsibility of collecting payment from your customers, removing a time-consuming burden from your business’s to-do list. This allows businesses to foster a healthier relationship with their B2B customers, as the relationship isn’t based solely on securing payment from them.  

Disadvantages of Invoice Factoring

Despite the advantages, business owners need to know the potential risks associated with invoice factoring. There are some things readers will want to consider.

(Slightly) Reduced Profit Margins From the Factoring Fee

Accounts receivable financing companies are businesses, too. Factoring companies make money by purchasing another business’s A/R at a discount. This is called the factoring fee. The factoring fee is a percentage that both the factoring company and the business (or creditor) negotiate. It is the amount the factoring company keeps from the invoice. 

Your Customer’s Creditworthiness Affects the Factoring Fee

The percentage usually ranges from 1% to 5% and depends on the risks—like the creditworthiness of the client (and sometimes the customer). 

You Are on the Hook if Customers Don’t Pay Their Invoices

Many factoring companies, including ours, offer recourse factoring services. With recourse factoring, your business is responsible for paying back the money should your customers not pay their invoices. 

Recourse factoring involves less risk for the factoring company. As a result, recourse factoring services are more affordable for small and medium-sized businesses.  

The other option is non-recourse factoring, which Great Funds Factoring doesn’t offer. Check out our blog post on recourse vs. non-recourse factoring to explore the differences further. 

Is Invoice Factoring Right For Your B2B Business?

Invoice factoring is a good financing option for new businesses experiencing cash flow issues, or small and medium-sized businesses that experience seasonal or industry-specific lulls in business activity. 

If you are having trouble expanding your business or investing in growth opportunities because of a lack of working capital, consider selling your A/R to a factoring company that can transform unpaid invoices into fast cash. 

Great Funds Factoring Helps Grow Your Business

Ready to fund your business upfront? Fill out a credit application and improve your cash flow in days—not weeks or months!

Want to speak to a factoring specialist to learn more about our services? Fill out our contact form