Invoice factoring refers to purchasing a business's invoices to reduce the amount of money they owe to their customers and vice versa. The business that receives the invoices is called the factoring company, and the business that is being paid back is called the primary company. The primary company typically pays the factoring company a fixed percentage of the amount that they are being paid back by the customers. This percentage is generally below 10% of the total amount.

Types of Invoice Factoring

There are various types of invoice factoring, each with its advantages and disadvantages. Some of the most common types of invoice factoring include:

1. Accounts Receivable Financing

This invoice factoring is often used by small businesses that have recently started and don't have enough money to pay their invoices. 

Because the loans provided through invoice factoring are short-term, this is often a good way for small businesses to get the liquidity they need without additional debt. Mostly, the loans provided through invoice factoring will be between one and seven years in length.

2. Commercial Invoice Financing 

This type of financing involves a third-party financing company lending a business money to pay its invoices. The third-party financing company has either packaged the financing into an entire financial package or sold short-term notes secured by invoices. 

We mainly recommend this type of financing to businesses that:

-Have a large number of uncollected receivables.

-Have a good standing with their customers.

-Have good credit. 

3. Recourse Factoring

Recourse factoring refers to the practice of a third-party factoring company liening the assets of a primary company when they have been unable to pay their invoices. It allows the factoring company to purchase the invoices of the primary company, which in turn allows the business to continue to operate without having to worry about not being able to pay its customers. 

Recourse factoring is a good option for businesses with a large number of receivables that have proven their ability to pay their customers consistently. 

4. Maturity Factoring

Maturity factoring is where the factoring company loans funds to the business so that it can purchase its outstanding invoices at a discount. It means the company can continue operating and generating revenue but does not need to pay its bills.

We mainly recommend this factoring to businesses with lines of credit running out or small business owners who do not have enough credit to get traditional financing. 

5. Full Factoring

A Full factoring invoice is a method that spreads the payments out over multiple invoices, so businesses can stay in control and avoid accumulating large amounts of debt. 

Because full factoring requires the use of money, most of it is done on a paid-in-full basis for a predetermined period. 

We mainly suggest full factoring for businesses that have been hit hard by the pandemic and need fast cash to keep their doors open. 

6. Suppliers Guarantee Factoring

This type of factoring guarantees a way for suppliers to protect themselves from the risk of non-payment and ensure that payments are made promptly. Basically, it means that suppliers are paid in full by the factoring company once the client's accounts have been settled. 

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Importance of Invoice Factoring to Your Business

In today's economic crisis, factoring has proven to be an invaluable financial resource helping businesses keep their doors open. Here are some key benefits of invoice factoring: 

1. Reliable Cashflow

Most businesses operate on a cash basis, meaning they need a reliable cash flow to stay open. Because invoice factoring allows companies to keep their lines of credit, they can continue to operate without needing to take on additional debt. It then allows them to focus on growing their business and generating revenue without worrying about not being able to pay their employees or suppliers. 

2. Grow Your Business

Growing a business means improving and expanding the way you do things. By outsourcing your factoring needs to us, you can continue to grow your business without adding more overheads. Doing this allows you to serve your customers better and generate even more revenue.

Additionally, factoring allows you to minimize the time and hassle associated with collecting your invoices. 

3. Maximize Working Capital

Working capital enables a business to operate its existing operations, pay its operating expenses, and generate sales. 

Because invoice factoring allows businesses to keep their lines of credit, they can continuously generate revenue without worrying about being unable to pay their customers. Doing so will enable them to maximize their working capital and continue to grow their business. 

4. Minimum Debt Accumulation

With invoice factoring, your business will maintain low debt levels by spreading it out over multiple invoices, allowing it to continue operating and generating revenue. 

Besides, alternative options like a Merchant cash advance and SBA Loans can also get considered. A Merchant cash advance is similar to a factoring program, but it is usually offered by small business credit card processors instead of factoring companies. It involves borrowing money at a high-interest rate from a bank or other lender and then selling these debts to a factoring company at a discount. 

5. Offers More Flexibility

Invoice factoring offers a lot of flexibility for developing businesses. It's also great for companies with many product lines because they can add or remove their sales or billing section without changing their entire business model.

Besides that, your business will also gain flexibility regarding how and when you invoice your customers, which means that you can invoice any customers on any date or time you want. 

6. Better Credit Control

With invoice factoring, you can better control the credit that you give to your customers. Doing this will help you avoid the risk of a bad payment, which can ultimately damage your business. On top of that, invoice factoring allows you to receive payment faster and at a lower interest rate. 

7. Reduced Costs and Increased Efficiency

Outsourcing your factoring functions, such as invoicing and collections, can help lower your costs in the following ways:

-Reduced bad debt expenses: Because you no longer have the responsibility of collecting customer payments, you don't have to worry about bad debt costs.

-Reduced operating costs: Because you aren't managing collection efforts yourself, you no longer have to pay for staff to collect your invoices.

-Increased cash flow: Because you no longer have the responsibility of collecting on your customers, you no longer have to wait for them to pay you before you can use the money for other purposes.

-Improved financial performance: Because there is less credit risk, a factoring company can offer you a better interest rate than you would otherwise receive. 

-Streamlined workflow: A factoring company will help reduce the hours you spend on bill collection, saving on labor.

8. Capital Retainment

Invoice factoring allows you to access money from a third party without losing part of your company's capital. It's also quicker and easier than a traditional capital increase because you don't have to worry about going to court to get a higher rate of return from your capital. 

In addition, invoice factoring is a form of a non-dilutive capital increase, which means you can continue growing your business without having to pay more money into it. 

9. Reduced Taxes Burden

Invoice factoring can also help your company reduce its tax burden. Since you no longer have to pay taxes on any of your income, you can be more confident in your ability to invest in your business and make more money from your investments. 

Additionally, invoice factoring provides tax benefits for income otherwise treated as effectively earned rather than passive.

To sum up, invoice factoring can help your company manage its cash flows more efficiently and avoid the pitfalls plaguing most companies. Contact us today and learn more ways to use invoice factoring to grow your business.

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