Invoice factoring allows businesses to sell their unpaid invoices in exchange for instant cash, comprising 70% – 90% of the total invoice value. Businesses with cash flow difficulties use this opportunity to meet their urgent expenses and improve their cash flow altogether. The institution that purchases the invoices is called a factoring company, which also provides the upfront advance cash. In return for this service, the factoring company charges a factoring fee, typically between 1% -5% of the total invoice value.
Now that we understand what invoice factoring is and how it works, let us discuss the five main reasons it might be the right choice for your business.
1. Provides access to instant funds
In business industries like construction, research and development or architecture, businesses often deal with lengthy invoices. The payment terms of such invoices can range from 60 days – 90 days or even more. In addition to these extended payment terms, clients may also delay payments beyond the due date.
This temporary lack of funds can cause serious disruption to a business’s cash flow. It might struggle to pay its employees, maintain the usual business activities or take on new projects. To avoid such a situation, the cash flow gap must be filled, and invoice factoring does exactly that.
2. Does not add to business debt
Invoice factoring does not add to your existing debt. Unlike traditional lending options, it does not involve borrowing cash or paying it off on an interest basis. It does not even appear as a loan on a business’s accounting records because it is simply the sale of something you already own, the invoices, which represent your future receivables.
This is why invoice factoring does not negatively impact a business’s credit score. In fact, it can even add value to a business’s financial legitimacy if the invoice factoring agreement is completed successfully. It shows that the business has a trustworthy client base and a reliable financial record.
3. Offers easier qualification
It is generally easier for a business to qualify for invoice factoring than for traditional bank loans. While the exact qualification criteria vary with each factoring company, the one thing they all assess is the creditworthiness of the business’s clientele. In invoice factoring, the focus of evaluation shifts from the business’s own credit score to that of its client’s financial reliability. So, it even allows businesses with an inadequate credit history or a bad credit score to qualify for a financing option.
Having a reliable and transparent qualification process is critical here. To help you select a trustworthy factoring company, we have compiled a list of the best invoice factoring companies for you to explore.
4. Requires no collateral
Invoice factoring typically does not require any type of security collateral. It is because the main risk of late or non-payment is associated with the customers and not the business itself. If a customer has a strong financial track record, the factoring company considers the invoice less risky and vice versa. Based on this evaluation, the higher the risk, the higher the factoring fee is likely to be.
5. Reduces the administrative burden
During the invoice factoring process, ownership of the factored invoices transfers to the factoring company. This means the factoring company takes over the entire process of collecting payments, giving payment reminders to clients, and tracking which invoices have been paid.
All of this reduces the administrative burden of chasing payments for the business. This way, it can save valuable time and resources to focus more on the core business operations. Since the factoring company interacts with the customers directly, it is important to choose the one which prioritises the business’s relationship with its clients. With ComparedBusiness UK, you can secure invoice factoring from the most reliable and professional factoring companies. Based on your business requirements, you can choose the best option for your business.
