What Is Factoring in Business and How Can It Benefit Small Companies?

Small businesses often experience cash flow fluctuations. These can be seasonal, as some companies make a high percentage of their annual sales during the holidays or summer. Economic conditions can also cause ups and downs for any business.

If you ever wondered what is invoice factoring, it’s a type of financing  that can help businesses get through slower periods and experience steadier cash flow. What is factoring in business? It’s a type of financing that involves selling invoices and getting cash upfront. What does a factoring company do? These companies purchase invoices from businesses in exchange for a small fee.

What Is Factoring in Business?

Although it’s not as well known as many other types of financing, invoice factoring is a simple concept. A business sells its unpaid invoices to a third party, known as a factoring company. Rather than waiting for clients to pay invoices, you can get cash right away, in as little as a day. Factoring companies charge a small fee for transactions, but there’s no interest accrued as with a loan.

There are two basic types of invoice factoring, recourse and non-recourse. With recourse factoring, you are responsible if your client doesn’t pay an invoice. With non-recourse factoring, the credit risk is assumed by the factoring company. Because of the added risk, you’ll pay slightly higher fees for non-recourse factoring.

Related: Factoring Costs and Benefits

What Is Factoring Invoices?

You may be wondering what the actual process of factoring involves. Here are the basic steps.

• You render a service to your customer and create an invoice. This is the same as you normally do business.
• You sell the invoice to a factoring company. They’ll pay you for most of the value of the invoice right away. The exact percentage depends on the company and industry, but the average is between 80% and 95%.
• The factoring company then collects payment from your client.
• After receiving payment, the factoring company sends you the remainder of the invoice value with a fee deducted. The fee is usually between 1% and 5%.

Related: The History of Factoring

What Does a Factoring Company Do?

If you’re not experienced with factoring, you may have little knowledge of factoring companies. However, they play an important role in business financing, for small as well as larger businesses. They perform a few different roles.

• Purchase invoices. This is their primary function.
• Providing fast cash flow to businesses. The key point here is speed. It can make a huge difference to a business if they get paid right away or have to wait a month or more.
• Handle collections. Once they buy an invoice, they take on the responsibility of collecting payments.

Related: NerdWallet Names Riviera Finance Best Non-Recourse Factoring Company

Benefits of Factoring For a Small Business

Small businesses can gain several advantages by factoring invoices.

• Gives you better cash flow. Factoring provides you with consistent working capital. It lets you avoid taking on debt. Unlike loans, factoring doesn’t affect your credit or involve interest payments.
• It helps your business grow. You can use the improved cash flow for hiring more employees, investing in marketing, renovations, equipment, or anything else your business needs to grow.
• It frees you from having to make collections. The factoring company takes on these administrative tasks so your employees can focus on more productive activities.

Should You Consider Invoice Factoring?

Many businesses have questions such as what factoring invoices means? Once you have a basic understanding of how it works, you may be wondering if it’s a good solution for your business. There are a few points to consider.

What industry are you in? Factoring works for quite a wide variety of industries, including transportation and trucking, staffing agencies, manufacturing, a wide-range of service providers, energy and many others. The main consideration is that you must have a business where clients pay you via invoice.

If you want to consider factoring, the next step is to find a trustworthy company. Look for a company with a good reputation and experience working with businesses in your sector. The application process is usually simple, especially compared to other types of financing such as bank loans.

Riviera Finance is a factoring company with over 50 years of experience. We offer simple applications with no set-up fees or long-term contracts. We also pay the highest cash advances in the industry to help boost your cash flow quickly. To learn more about invoice factoring, contact us.