It’s hard enough to grow a small business, even in a successful economy. However, with small business invoice factoring, payments for your unpaid customer invoices can help solve urgent cash flow issues.
If you are a high-risk business or a company that works in industries with generally low profit margins, generating positive business cash flow and increasing your revenue can be very stressful, especially when you are trying to grow your business. Even companies in a low-risk environment need revenue at all times. After providing a service or selling a product, companies will generate accounts receivable for each of their customers and send some type of invoice to the client.
Unfortunately, many businesses will not receive payments for their goods and services right away. It is highly common for payments to arrive weeks—even months—after the customer has been billed. This can be incredibly stressful for any business, as funding is essential to success.
Factoring Works Differently Than Loans
Factoring is basically the sale of accounts receivable to a third-party factoring company. The company buys the invoice for a large percentage of the balance due, which immediately provides the needed funds to support the business. Once the invoice has been paid in full, the factoring company pays the remainder of the balance to the business, minus a small processing fee, known as a factoring fee.
An example of factoring in action is freight bill factoring. This is the process of selling the accounts receivable owned by a commercial freight company to a freight bill factoring company. This is beneficial, as it can help trucking companies avoid debt and liability. It is also much more beneficial than choosing to finance a short-term loan, asset-based lending, opening a line of credit, or investing in venture capital. Increasing a business’s debt can only hurt a growing business; with freight companies in particular, the cost of operation is constant.
Small Businesses Save Time and Avoid Debt with Factoring
It can be crippling to wait for a payment or, even worse, face the reality of paying back a loan with high interest rates. For a small business, invoice factoring is a cash advance option that provides almost immediate cash flow, has a higher approval rate, and saves you time because the factoring company collects payments from your customers instead of you needing to follow up on unpaid invoices.
Small Business Factoring is More Accessible Than Traditional Financing, Too
Utilizing a factoring company is a practical move for businesses of all types. However, small businesses need the assistance of invoice factoring companies the most. Small businesses are least likely to have funds in reserve and are at the highest risk of bankruptcy or being forced into taking out small business loans. In 2015, less than 15% of small business loans were approved, which indicates that taking out a small business loan may not be a viable option in the first place. Hiring a factoring company can only help a small company stay afloat during its critical periods of growth.
Work with a Factoring Company That Supports Small Business Success
If you are looking for quick cash flow for your business but need an alternative to a small business loan, contact Charter Capital to find out more about how our small business invoice factoring services can help you or request a complimentary rate quote online.
FAQs About Invoice Factoring for Small Businesses
Is invoice factoring a loan?
No, and that distinction matters. When you sell your unpaid invoices to a factoring company, you receive funding without taking on any repayment obligation. Nothing is added to your liabilities, and your balance sheet stays clean. For a small business trying to grow without adding financial pressure, that is a meaningful difference.
What happens if a customer does not pay their invoice?
It depends on the type of factoring arrangement you have. With recourse factoring, you are responsible for buying back the unpaid invoice if the customer does not pay. With non-recourse factoring, the factoring company absorbs the loss if the customer becomes insolvent. Before you sign anything, make sure you understand which structure applies and what it means for your business.
Does invoice factoring affect business credit?
Approval is based primarily on your customers’ ability to pay, not your own credit history. That makes factoring accessible to small business owners who may have been turned away by traditional lenders. Because no debt is recorded, it generally does not affect your credit standing the way traditional financing would.
What should you look for when choosing a factoring company?
Look at the advance rate, fee structure, and contract terms, and find out whether the company has experience working with businesses in your industry. It is also worth confirming whether recourse or non-recourse factoring is offered and how disputes are handled. A factoring partner that understands your cash flow cycle is far better positioned to support you when you need it most.
Which types of businesses benefit most from invoice factoring?
Businesses that invoice other companies or government entities on net payment terms tend to benefit the most. Industries with payment cycles that run 30 to 90 days, such as staffing and manufacturing, are common users. If your business collects payment at the point of sale, factoring is generally not an option since there are no outstanding invoices to sell.
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