Factoring Invoices Explained: Quick Cash for Your Business

If you need quick cash for your business, you have come to the right place. In this guide, we will explain invoice factoring and how it can help you manage cash flow.

Invoice factoring is a form of alternative financing for businesses with pending invoices. It is an option to consider if you don’t want traditional bank loans or can’t secure the loans for other reasons.

By factoring invoices, you can pay employees on time, order more supplies, and accomplish other financial needs while you wait for your clients to pay. To get this form of financing, you only need a credible invoice and a good factoring company.

Keep reading for more insights and how to get started.

What Is Invoice Factoring?

Invoice factoring is a type of business financing whereby a company sells its invoices to a factoring company. The factoring company checks the invoice to evaluate the amount of money the borrower can get and then offers it.‍

Factoring invoices is simple; the borrower doesn’t have to wait long to get the money. However, the factoring company charges a small fee, ranging between 1 and 5% of the invoice value.

How Invoice Factoring Works

Here is a brief step-by-step guide showing how the invoice factoring process works.

Step 1: Find a Factor Company

A factoring company is any lender willing to buy your invoices and give you money in return. There are many factoring companies; you can choose one by checking their reputation and the amount they charge.

Step 2: Deliver Your Invoice

You should have invoices to qualify for invoice factoring. Create a copy of all the customers' invoices and take them to your factory company.

Step 3: Evaluation

The factoring company will carefully examine your invoice to determine the maximum amount you can receive. Note that the company may not offer 100% of the invoice amount because that is risky. However, you can expect to receive between 75% and 90% of the total invoice amount. In most cases, the money is given to you in two installments. If the factoring company agrees to finance you, they will credit the amount to your account.

Step 4: Follow-Up

Your customers will send the money to your factoring company, which will follow up with customers to ensure they all pay. Assuming your clients pay, the factoring company will pay you the remaining amount after subtracting their fees.

How Invoice Factoring Benefits Businesses

Invoice factoring is an excellent type of financing for all businesses, mainly those with slow-paying clients. Before the clients pay, this financing allows the company to get money to make more orders or meet other financial needs without pushing the clients. Here are the main advantages of using invoice factoring.