What Is Invoice Factoring? Demystifying Invoice Funding Services

Unfortunately, bankruptcies have been on the rise in the United States. In fact, in the second quarter of 2016, they increased to 25,227 companies — up from 24,797 companies in the first quarter of the year. This is in part because a lot of small business are experiencing financial difficulties, especially as they attempt to get on their feet. With that being said, bankruptcy is not a foregone conclusion, even if your small business is experiencing financial difficulties. There are a number of different options available — one of which is invoice factoring.

There are a lot of myths regarding invoice factoring, which can make it difficult for some to decide whether or not it’s a viable option for them. With that being said, we’re going to look into what small business invoice factoring services actually involve, and why they could be a great fit for your business. The concept may be intimidating at first — but these services could potentially be what stands between your small business and financial failure.

What Is Invoice Factoring?

So, what do invoice factoring services involve in the first place? Invoice factoring is often confused with typical loans, which is why some small business owners are concerned about taking advantage of it. Technically, invoice factoring services do not involve giving out loans. Instead, a small business would sell its unpaid invoices to an invoice factoring company at a discount. Once the invoice is paid, the company would collect rather than the small business itself, having already received payment from the company. Usually, the invoice factoring services do not involve advancing the small business 100% of the invoice. The invoice factoring company would typically charge a percentage of the invoice as a fee, and advance most of the invoice to you–often 85%. The small business would then collect the remaining balance of the invoice once it is paid, from the invoice factoring company itself.

Why Use Invoice Factoring?

The reason why invoice factoring is so appealing to many small business owners is that it in fact offers a way for them to get their money faster. Many small businesses wait an extended period of time for their invoices to be paid, leaving a gap in payment that some simply can’t afford. That gap can be bridged through factoring companies, as they offer upfront payments of up to 90% of the original invoice. For that matter, the factoring companies become responsible for the invoices, and can take measures that help cut down costs. Really, some small businesses could learn from factoring companies; something as simple as switching from paper invoices to electronic invoices can cut expenses, as electronic invoices are 57% cheaper than paper invoices.

Who Is A Candidate For Invoice Factoring Services?

Invoice factoring services are great options for, again, small business owners that need money fast — however, these owners should also take credit into mind. Invoice factoring companies do typically check the credit worthiness of those being invoiced before approving the small businesses who charge the bills in the first place. This is one reason why small business owners sending out extended invoices should be aware of their clients’ abilities to pay. Understandably, small business factoring companies cannot take on invoices for clients that can’t be trusted to pay. For that matter, if an invoice factoring company takes on an invoice that remains unpaid, this could have repercussions for the small business owner. Of course, this is one of the reasons why invoice factoring companies take on invoices that are due within 90 days — there is less of a likelihood that, so close to the deadline, a creditworthy person or business would fail to pay.

While invoice funding companies are not necessarily what a small business should rely on for the long term, they can help small business owners in the short term. If a small business owner risks failure by not using an invoice factoring service, they should certainly consider it. A trustworthy company provides not only a source of upfront payment, but financial relief with potentially long-term positive effects.

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