What is Invoice Factoring, Anyway?

What is invoice factoring? It’s a financing tool that has been used for centuries to speed up cash flow and unlock working capital. 

Many B2B businesses that invoice their customers discover that waiting for their customers to pay means waiting 30 days, 60 days, 90 days (or even longer) to reinvest in their own business – which can also result in countless lost opportunities for additional sales and growth due to lack of working capital. If you’re tired of chasing customer payments, invoice factoring might be the answer. But what is invoice factoring?

What is invoice factoring, anyway?

Invoice factoring (also known as receivables financing or invoice financing) is a centuries-old business finance tool available to organizations that invoice their customers that speeds up cash flow and unlocks working capital.

For a small business, it’s not lack of profits but often a lack of available working capital that restricts growth, causes cash flow problems or even results in the small business going under. This issue can be compounded for B2B companies (organizations that sell to other businesses) that invoice their customers upon order fulfillment – and consequently have to wait for payment – instead of receiving payment immediately like their retail counterparts.

Whether or not you extend lengthy terms of payment to your customers, you may still find yourself waiting for customers to pay, or you may have customers worth waiting on. In either case, lost time nearly always equals lost opportunities.

What is invoice factoring? It’s a cash flow management tool that can fill the cash flow gap between the last customer order and the next one. Invoice factoring companies provide their factoring clients with immediate access to money that is locked up in their accounts receivable invoices while they wait for their customers to pay.

What is Invoice Factoring and How Does the Invoice Factoring Process Work?

The invoice factoring process usually works something like this:

1. A B2B business fulfills a customer order and an accounts receivable invoice is generated
2. Instead of waiting for their customer to pay the invoice, the B2B organization factors (or sells) the invoice to a factoring company for a low factoring fee (we offer rates as low as 1%)
3. The factoring company forwards up to 98% of the face amount of the invoice to the B2B organization immediately, usually the same day the invoice is factored, holding the remainder in what is referred to as “a reserve”
4. After the customer has sent payment the B2B organization also receives the reserve

What’s the difference between non-recourse and full recourse invoice factoring companies?

Working with a non-recourse invoice factoring company provides added benefits. Non-recourse factors assume the credit risk for the invoices purchased. By contrast, companies that factor with recourse do not assume the credit risk of factored invoices and may require their customers to “buy back” factored invoices if they remain unpaid for a given period of time or the customer is unable to pay.

The majority of factoring companies in the United States factor with recourse; meaning, they may require you to buy back invoices factored with them in addition to the incurred factoring fees and any associated legal or collections fees.

Invoice factoring is a fast, flexible small business financing tool.

Unlike credit union loans or bank loans which often come with stringent restrictions, the funds obtained through invoice factoring can be used to finance your small business in nearly any way you see fit.

Invoice factoring isn’t a loan, it’s simply a business finance tool that can give you immediate access to the money that would be tied up in outstanding customer invoices without waiting for customers to pay. As a small business financing tool, invoice factoring can provide your B2B company with the means to:

• Grow by adding inventory or making new product or service lines available to your customers
• Gain a competitive edge by extending more favorable terms to your customers
• Improve cash flow or ensure cash flow on hand is adequate for operational expenses
• Give your small business the ability to take on new customers more quickly, serve larger accounts or fulfill larger orders

What Types of Businesses Generally Use Invoice Factoring to Finance Their Organizations?

While factoring may be an appropriate business finance tool for any number of organizations that invoice their customers for payment, there are some industries where it is especially effective. Many of our clients come looking for:

• Freight factoring (or trucking factoring)
• Factor for companies related to oil and natural gas industries
• Factoring for staffing agencies, recruiting firms, nurse staffing agencies or security guard companies
• Factoring for Zulily, Amazon and similar ecommerce vendors
• Factoring for manufacturers and distributors
• Telecom, satellite and cable business factoring
• Government contract factoring
• Construction factoring
• Software and app developer factoring
• Invoice factoring for printing companies, marketing firms, architects or engineering companies
• And other B2B service providers and consultants

If your organization has a business model similar to these types of companies, it’s very possible that factoring could provide you with access to working capital locked down in your own receivables. You can use this financing to grow your small business by reinvesting more quickly in your own company or improving cash flow over the short or long term.

To find out more, submit a quick quote form to request information. We will get answers back to you in 24-48 hours, or even less and you could go from approval to your first funding in hours.