What is Invoice factoring?
Invoice factoring is a financial transaction in which a business sells its invoices to a third party called a factor at a discount. Most of the reasons why a company might decide to factor its receivable assets are to meet its immediate cash needs or to mitigate credit risk.
An invoice factoring company is a third-party financial institution that provides businesses cash in exchange for the unpaid, outstanding invoices. After this transfer with businesses, an invoice factoring company will typically take it upon itself to collect the invoice from a business’s customer.
Invoice factoring companies help businesses to fix their cash flows as they wait for customers to pay them for their services.
How does invoice factoring work?
- First, your company offers goods and services to customers who are creditworthy and provide the correct invoices.
- Then your company sells its unpaid invoices to an invoice factoring company
- After that, an invoice factoring company verifies the invoices and then funds your business with an immediate payment of up to 90% of the received amount within 24 hours.
- Lastly, the customers make payment directly to the factoring company according to the terms of invoice. The invoice factoring company then returns the balance of the paid invoice minus the fee.
How can you benefit from invoice factoring company?
There are several ways that you can benefit from a factoring company. However, there are also other mistakes that you should not make when factoring. The following are benefits of factoring.
- Factoring can improve your credit
And since factoring increases your cash flow, you can potentially improve your credit and credit ranking. Through factoring your receivables and having money available instantly, you are in better position to pay other companies who have offered their services to you on time. This allows you to maintain good relations with your other creditors.
The act of raising your personal and business credit score mainly leads to you paying your bills on time or early and not improvising on your available credit. By doing these two things consistently, your ability to qualify for more credit will expand.
Factoring provides you with consistent cash flow. And through consistent cash flow, you are able to pay your bills on time or early and use your available credit lesser and hence improve your credit and raise your credit score.
- It helps you to improve your cash flow and build working capital without incurring debt
Since factoring is not a loan, it can help you access the funds that you need quickly with minimum credit requirements. In the end, you can get working capital without impairing your credit, or without incurring debt.
If you were to obtain a small business loan from a bank, the debt will affect your credit score which can make it difficult for you to get approved for a loan.
- Factoring improves your credibility
When you partner with any invoice factoring lender, you will pay your bills on time. Paying your bills on time doesn’t just enhance your credit, it also improves your credibility. When you pay your bills on time, it maintains a good relationship between you and the companies that supply you with goods and services that your company needs. If you fail to pay your suppliers and contractors on time, they may stop doing business with you completely.