Your business relies on customers paying their invoices to maintain its daily operations. Use of invoice factoring is quickly skyrocketing as more businesses recognize the benefits of this alternative source of financing. According to a recent Grand View Research report, the global factoring market will reach $7,005.9 billion by 2030.
Factoring your business’s invoices provides it with immediate funds to manage its cash flow needs and relieves the burden of chasing late invoice payments. Learn more about the benefits of factoring your company’s invoices and how it could open new opportunities for your company.
Invoice factoring is the process of a business selling its unpaid invoices to a factoring company for immediate funding. The factor advances a portion of the total invoice amount immediately, ranging from 75% to 90% of the amount. The business can then meet its short-term cash flow needs, whether purchasing supplies, paying debts or funding its mission-critical operations.
The factor then pursues payment from the business’s customers and remits the remaining invoice amount to its client minus a small fee. The factoring process allows companies to receive a significant portion of their unpaid invoices earlier than if they had to wait for the payment period specified on the invoice.
There are several benefits of factoring accounts receivable for your business, from improving cash flow to mitigating financial risk. Consider these benefits of invoice factoring and the impact they could have on your operations:
One of the most significant advantages of factoring in business is that it improves your company’s liquidity. Instead of tying up your funds in your accounts receivable and waiting for customers to pay, your business gains immediate funding to boost its cash flow. Invoice factoring can help companies pay their expenses and take on new business.
Another benefit of factoring is outsourcing the management of your company’s accounts receivable. In the factoring process, the factoring company becomes responsible for pursuing customer payment on behalf of your business. This benefit allows your business to focus on other, more critical tasks. A factor may also manage your company’s sales ledger and transactions.
Factoring benefits businesses that might otherwise turn to traditional forms of debt like lines of credit or loans to meet their cash flow needs. Taking on a small business loan could burden companies with hefty interest rates and the responsibility to repay the loan, even if the customer never pays.
With invoice factoring, businesses can use immediate funding to invest in other ventures or pay for their next orders. It may also be easier for companies with damaged credit to qualify for factoring than a traditional loan.
When a business engages in non-recourse invoice factoring, it is freed from absorbing unpaid invoices. With recourse factoring, if a customer delays paying their invoice past a set date, your company repurchases the invoice from the factor, resulting in a loss.
However, non-recourse factoring places the financial responsibility for unpaid invoices with your factor. The factoring company will pay your business the invoice balance, bearing the risk of the outstanding debt.
If your company needs cash immediately, it may be unable to provide customers with longer payment terms like 30, 60 or even 90 days. Invoice factoring allows you to grant those terms to customers and possibly expand your business with customers who require longer payment terms since the factor advances you cash for your invoices.
The more flexible financing that factoring provides is one of the best reasons to factor your invoices. You can find a factoring company with flexible lines that increase or decrease as your invoices demand. Factoring can also be a short-term solution that enables your company to take on a new business opportunity, as many factors will work with you on a plan that meets your needs.
Factoring helps your business increase its competitiveness and solve several cash flow challenges. If your company is facing any of the following situations, consider whether factoring your accounts receivable might be a good option for you:
Slow-paying customers can significantly impact your business’s cash flow. If customer payment is due in advance or upon receipt of the goods or service, financing may not be an issue for your company. However, many invoice terms vary from 30 to 90 days. Going for a couple of months without receiving payment can be a challenge for many companies, especially small businesses that need cash to continue their operations.
Factoring meets companies’ financing needs by allowing them to unlock the funds tied up in unpaid invoices. Instead of waiting several weeks for payment, a business immediately receives cash from its factor.
Managing their accounts receivable can cause significant headaches for businesses while they pursue payment. The distraction of slow-paying customers can be especially difficult for small businesses that may not have the staff or resources to spend time following up on late invoices. Even managing payment collection from customers who pay their invoices on time can be a hassle for a small business.
Invoice factoring relieves the burden of accounts receivable management on the business. The factoring company will take over the management of your company’s invoices, pursuing payment from customers. Depending on the stipulations in your factoring agreement, the factor may also assume responsibility for invoicing your customers.
Late-paying customers can be a financial risk to companies that depend on steady cash flow to meet their operational needs. A non-paying customer poses an even greater risk. If an invoice goes unpaid, the company must take it as a loss.
With invoice factoring, your business may be able to protect itself against these situations. Factoring provides businesses with a significant portion of the total invoice amount upfront, lessening the risk that late payment poses. If a factoring agreement is non-recourse, the factor protects the business from the risk of non-payment.
When your company factors its invoices, it can improve liquidity, streamline its operation and mitigate risk, all to gain a competitive edge in the market. Businesses in industries from manufacturing to health care have recognized the benefits of factoring receivables and are utilizing the strategy to improve their cash flow.
At FactorFox, we provide factoring services for businesses in various industries to help them gain the advantages of invoice factoring. FactorFox was the original factoring software, and we carry our dedication to providing efficient and secure factoring into our services. Our team is equipped to handle your business needs with fast turnaround and advanced customer support.
To learn more about how your company can benefit from factoring your invoices with FactorFox, contact us today.