Back to Blog

The best feeling in the world as a business owner is getting paid. The worst? Waiting to get paid. Whether it’s due to trade credit or delinquent customers, waiting on money is awful. That’s where invoice factoring can help as a fast, effective way to free up cash tied up in unpaid invoices. 

If you haven’t heard of invoice factoring before, it’s a well-established trillion-dollar industry. For history buffs: The earliest form of invoice factoring first appeared in the Code of Hammurabi from 1754 BCE. For newbies and entrepreneurs who want to be informed — here’s what you need to know about how it works. 

How invoice factoring works 

Invoice factoringis a fairly simple concept: If a company has one or more unpaid invoices that are due from clients, but haven’t yet been paid to them. It lets businesses sell their invoices to lenders (factors) for the sum of their outstanding balances. You essentially borrow against your outstanding invoices to get your money faster — since the factor provides the cash instead of the customer. This creates more financial flexibility, all without a lengthy-term loan application process. 

The factor holds onto the borrower’s invoices in exchange for a percentage of the total value of the invoices. The factor is then responsible for the collections process, typically by working directly with the clients who are paying for services. Once the factor is paid, the business receives the remainder of the balance — minus interest and fees. 

The benefits 

Steady cash flow: Instead of dealing with the unpredictability of getting paid bit by bit, using a factor ensures you have a steady flow of money. No more waiting for customers to pay on their own schedule – you get a consistent income. 

Less waiting on customers: You don’t have to rely on customers to pay their bills on time. By selling your invoices to a factor, you can get quick cash, avoiding the waiting game and putting money in your hands sooner. 

Quick money, less hassle: The factor provides a substantial portion of the invoice money right after the sale. You get the funds quickly, and they handle the tough job of making sure your customers pay. It’s a faster and less complicated way to get the money you need. 

No chasing payments: Say goodbye to the hassle of chasing down payments from customers. The factor takes on the responsibility of collecting payments, saving you time and energy. 

Five ways your business can use invoice factoring 

Here are some examples of what businesses can do with the money they receive through invoice factoring: 

Bridging cash flow gaps  

The most vexing issue with unpaid invoices is the uncertainty they create for your company’s cash flow. You know that you have money coming in, but you’re not sure when you’ll actually see it in your account. Invoice factoring helps you take the guesswork out of when you’ll get paid — making it much easier to keep your company’s cash flow steady. 

By borrowing against the value of your invoices, you know exactly when you’ll have money in your account. It minimizes fluctuationsin your company’s day-to-day finances, all while making it less imperative to chase individual invoices to keep your business running smoothly and avoid cash flow problems. 

Accessing fast, short-term funding 

Keeping your cash flow steady is great. But, sometimes, you need a little extra help with paying for bigger expenses as well, such as payroll or emergency repairs. Instead of panicking when you’re short on operational cash but big on unpaid invoices, you can use invoice factoring to help take care of the little (and big) things that keep your company humming. 

Invoice factoring is usually a speedierprocess than obtaining a business loan or business line of credit. Those loans typically require collateral, extensive applications, and a lag between approval and the disbursement of funds. You can’t always wait that long if you’re short on cash to pay staff, replace broken machinery, or make an office repair. 

Using invoice factoring to access working capital 

Your company’s cash flow and operational budgeting might be perfectly fine from month to month.  Better still, your clients might be super reliable about paying their invoices on time. But even if any of those factors are true for your business, there may still be moments when you can benefit from having a lump sum that’s delivered to you more quickly than your invoice terms allow. 

In these cases, it helps you move up the payment timeline. There are also no restrictions on how you use the money — since, in essence, it’s your cash in the first place. You’re free to use invoice factoring to increase the amount of liquid funds on your balance sheet and apply them how you see fit. 

Investing in growth 

Another great time to pursue invoice factoring is when you’re ready to tackle a new project, initiative, or large order from an existing or new client. It’s not always easy to invest in the raw materials, machinery, or inventory you need when expanding your business. But through invoice factoring, you can convert your existing accounts receivable funds into money that can be used for all of the above. 

Even if you would not normally be in the market for invoice factoring, you can always call upon this resource when the unexpected (but exciting) prospect of future business or new initiatives comes around. 

Building and preserving credit 

Invoice factoring provides small business owners with an opportunity to get financing without impacting their credit rating, too. The money you get from it a loan since your invoices are the basis for the exchange between you and your factor. And, if you want to build your business credit, you’re free to use the money to pay off business debts. In these ways, it helps you preserve or improve your credit. 

Three questions to ask when considering invoice factoring  

If you’re considering invoice factoring, there are a few factors to consider. You’ll want to make sure you’re partnering with the right company, and on the right terms for your business. Here are a few of the big questions to consider before entering into an invoice factoring agreement: 

What are your odds of loan approval? 

It is typically easier to get approved for invoice factoring than for other kinds of loan products. With that in mind, you’ll want to consider whether or not you’re likely to get your business approved for other kinds of loans, or if your best bet is to pursue it from the get-go. 

If you’re considering working with a company, ask them which factors increase or decrease your risk profile, including years in business, previous credit history, the size of the invoices and the quality of your customers and their payment histories. 

How will invoice factoring impact your client relationships? 

Although invoice factoring is common, many factors require businesses to notify their clients about their partnership. Clients will pay invoices to the factor, rather than the business, which can sometimes require explanation and information. Not every small business owner wants to leave this component of their client relationship to a third-party, making a dialogue about invoice factoring beneficial. 

Which invoice factoring company is right for your business? 

Invoice factoring has been around for quite a while. In fact, it’s old enough to have seen a variety of industry-specific factoring companies flourish. Small businesses owners may not be familiar with invoice factoring companies, however, which means that it’s important to find one that has experience working within your field. 

If you’re used to waiting 30, 60, or 90 days to get paid, but often need the money in less time than your invoice payment terms allow —it may help you create a steady cash flow, a consistent pool of operating capital, or even an additional source of funds to help take on the next big chapter in a business’ growth. 

Consider another solution: Forwardly 

But wait, there’s more! If you’re looking for another way to streamline your cash flow, and reduce overdue invoices, consider taking a leap with Forwardly. Our modern payment solution offers affordable instant payments that can get you paid in just 60 seconds. Bid farewell to waiting and yes to faster, trouble-free transactions, reducing your debtors to zero with automatic payments. 

Explore the benefits of invoice factoring and discover the speedy world of Forwardly’s instant payments. Your business deserves the financial freedom it brings. Take the next step towards financial empowerment by delving into Forwardly’s capabilities through our product tour available here. Don’t wait, get started today! 


Read more

Accounting Salon May 13-15 2024

See Forwardly at Accounting Salon 2024

We are excited to announce that Forwardly is a sponsor at the upcoming Accounting Salon conference on… Continue reading See Forwardly at Accounting Salon 2024

2024-04-12 Events

Get paid instantly 24/7/365

Sign up for Free See pricing