Invoice Factoring for Business: Answers to FAQs

March 12, 2020

Invoice factoring is a popular financing strategy for businesses. The invoice factoring industry generated $4.9 billion last year. This is a testament to the value of invoice factoring for business. 

What is invoice factoring? What are the benefits of invoice factoring for business?

You can find answers to common invoice factoring questions below.

How does invoice factoring work?

Businesses can sell their accounts receivable to other companies for a small fee. This practice is known as invoice factoring.

What are the advantages of invoice factoring?

There are numerous reasons to use invoice factoring for business. Some of the biggest benefits are listed below.

Minimize cash flow problems caused by late payments

Some customers are notorious for paying invoices late. This can create serious cash flow problems. If the terms of your invoice are Net 60 and the customer is two months late, then you will have to wait four months to get paid. In the meantime, you will still have to cover the cost of goods sold, labor, and other operating expenses associated with the service that you provided for that client.

Invoice factoring allows your company to get cash much more quickly. You can use this cash to cover operating costs, pay off debts, and increase owner equity on your balance sheet.

Minimize anxiety

Many business owners get very stressed when they have to wait for their clients to pay their invoices. The biggest concern is uncertainty since you never know when a client will pay. A client could pay their invoice a month early or six weeks late.

Invoice factoring eliminates the uncertainty, which minimizes the stress that you will experience. A business will get cash to cover the outstanding accounts receivable, which gives a business owner peace of mind.

Cheaper financing option

Unless you have a large cash reserve, you are likely to need outside financing during periods where you have a high number of outstanding accounts receivable. The interest rates on traditional bank loans can be relatively high. If your company doesn’t qualify for traditional financing, then you might need to turn to alternative financing options that could be even costlier.

Invoice factoring is generally a more inexpensive financing option. You might want to consider factoring your invoices if you don’t want to incur large interest expenses.

Avoid A/R management expenses

Invoice factoring for business allows you to avoid the cost of managing your accounts receivable. The factoring company can assume the cost of collecting debts and other A/R management costs.

How much cash will you receive with invoice factoring?

BP Financial has very generous terms. Our clients can receive up to 95% of the value of their invoice. The exact amount depends on various factors, including the reliability of your customers.

Do companies need to factor all their invoices?

Companies are not required to factor all of their invoices. You decide which ones you want to sell to the factoring company.

Who is responsible for collecting payment after the invoice is sold?

The factoring company owns the invoice. They will contact your customers about paying it.