How Does Invoice Factoring Help Small Businesses?

November 12, 2022

Around 200,000 small businesses are established every quarter in the United States. And while they may encompass different industries, they all require one common thing to function — a steady flow of working capital. One of the biggest challenges small businesses face is the delay between when invoices are paid and when new inventory needs to be purchased. Invoice factoring allows small business owners to take out a loan against unpaid customer invoices.

This article will explain everything about how invoice factoring for small businesses.

What is invoice factoring for small businesses?

Invoice factoring allows small business owners to quickly unlock funds from pending invoices for operational expenses and growth opportunities. It enables businesses to get paid by a factoring company quicker, while factoring companies get paid directly by your customers.

The invoice factoring process lets you turn your accounts receivable into cash rather than waiting as long as 90 days for customers to pay. Invoice factoring companies typically pay you in two installments:

  • An advance, which is an upfront payment of 70 to 90 percent of the invoice
  • The remainder of the loan amount minus fees after the customer pays the outstanding invoice

Invoice factoring for small business: the pros and cons

There are several upsides and downsides when it comes to invoice factoring.

The pros

  • Easier approval. Many banks are hesitant to lend to small businesses, especially those with less-than-ideal credit. With invoice factoring, your credit score is not usually a factor, as factoring companies are concerned with your customer's creditworthiness. So if your credit or time in business is preventing you from securing a loan, invoice factoring may be the right option to secure working capital.
  • Fast access to cash. Meeting the necessary financial obligations to get to work immediately and not miss out due to a lack of funds is a significant plus for invoice factoring. If you have to turn down a big order from a customer because of a lack of cash, you can let the competition get ahead.
  • Spend your time growing your business. Having the ability to tap into a much-needed cash flow can empower you to focus on your real objectives — growing your business.

The cons

  • Factoring rates and fees tend to be higher. Fast cash can come at a cost for small businesses. Compared with small business loans, invoice factoring often costs more and is accompanied by additional fees. The factor rate can be charged as a one-time fee, or on a weekly or monthly basis, depending on the lender and terms determined.
  • Recourse factoring can land you in a difficult situation. There are two types of invoice factoring — recourse and nonrecourse. Recourse factoring is more common and makes you liable for unfulfilled invoices. If you sell a $25,000 invoice to a factoring company and your customer fails to pay, you’ll need to muster up the funds.
  • You may not be able to choose which invoices to sell. While some lenders offer spot factoring, some may require you to sell all your outstanding invoices.

Get in touch for invoice factoring for small businesses!

Don’t hesitate to get accounting and invoice factoring services for your small business. Reach out to BP Financing, and we’ll ensure you have the money you need to meet your upcoming financial obligations. We offer invoice factoring services to businesses that need cash sooner than their clients can pay out invoices. Call us at 845-352-3700 or send a message using our online contact form. We want to help you make sure your business is financially secure.