WHY DO COMPANIES USE INVOICE FACTORING

While there are many positives to invoice factoring, there are also downsides, depending on the nature of your small business and the factoring partner you choose to work with. Here, we’ll break down the pros and cons of invoice factoring.

Pros of Factoring

• Immediate access to cash for your business
• Easier and faster approval than traditional bank lending
• No impact on your credit score

Cons of Factoring

• Reduced profit margins for your business
• Hidden costs and fees from bad factoring companies

Let’s take a closer look at how invoice factoring works so you can decide if it’s worth considering for your own business to help with cash flow and more.

How Invoice Factoring Works in 6 Steps

Factoring is a way to turn unpaid invoices into cash for your business today. Here is how invoice factoring works in 6 easy steps. 

1. The factoring company establishes a credit limit on the customers you submit for invoice factoring
2. You deliver your product or service as you normally would
3. You send your invoices directly to the factoring company
4. The factoring company verifies that the product was received or service performed
5. You receive your cash from factoring company
6. Your customers pay the factoring company directly

Some factoring companies require you to factor all of your invoices and others do not.  So, if this flexibility is important to you, be sure to ask the factoring company before signing up.

As you can see from the above steps, invoice factoring is quite simple. Once you set it in motion, it’s actually quite a bit simpler to factor your invoices than to bill clients the traditional way. The factoring company does a great deal of the work for you since it functions as your back-office billing and accounts receivable department.