what is invoice factoring

What Is Invoice Factoring? Everything You Need to Know about This Small Business Financing Option

What is invoice factoring? If you are a small business owner who has struggled to get financing in the past, answering this question could be critical to your success.

Small businesses have to compete. They compete with other small businesses. They compete with large corporations. They compete every single day, and in most instances, they are at a disadvantage. Small businesses do not have the resources of their biggest competitors, so when customers do not pay their invoices on time, the impact can stunt the business’s growth.

Invoice factoring takes these unpaid invoices and transforms them into cash. In this article, we explain what invoice factoring is and what its benefits are for small businesses.

What Is Invoice Factoring?

Unlike other forms of financing, factoring is not a loan. The process works like this:

  1. First, you gather any unpaid invoices that you would like to collect on.
  2. Then, you sell them to a factoring company for cash.
  3. The factoring company then collects on their newly bought invoices, and you invest the money you received from the sale.

Seems easy enough, right? To be clear, when you sell your invoice, you do so at a slight discount.

For instance, let’s say you have an unpaid $15,000 invoice and you need cash faster than the customer can pay. You could go to a bank to get a traditional loan, but that takes time and you aren’t guaranteed approval. Loans also require good credit to get a low interest rate, not to mention you will need to provide collateral in case you default.

What is invoice factoring going to do to help?

It’s simple—instead of going through the loan application process, you approach a factoring company and sell your $15,000 invoice at a discount. Let’s say that the factoring fee is 2% (these fees usually run between 1-5%, so that’s a little lower than middle of the road). In the end, you would receive $14,700 in total.

If you want to learn more about our rates, call or write to us to set up a meeting

What Are the Benefits?

Invoice factoring has many benefits for small businesses:

Get Cash Fast

Instead of waiting for the bank to approve your loan or for your customer to pay, you get immediate working capital. That’s essential for any business.

Approval in 1-2-3

If you are worried that you might not be approved for a traditional loan, invoice factoring can help. Factoring companies don’t care about your credit—the value of the invoice is what is important to them.

Better Cash Flow

Customers appreciate leniency when it comes to paying their invoices. If you want to keep yours happy but need cash flow, you are a good candidate for factoring.

No Collateral

You don’t have to risk any assets to benefit from factoring.

What Is Invoice Factoring Going to Mean for Your Small Business?

We understand that times are tough. To learn more about how invoice factoring can keep your business going during this critical time, contact AA Bankers today.