Small business owners sometimes encounter periods of uneven cash flow because clients to whom they have offered long payment terms are slow in paying their bills. An effective solution to this dilemma is invoice factoring. This form of funding gives you the capital you require to keep your company prosperous and growing. Here are some tips to help you take advantage of this financing method.

Invoice Factoring Basics

Factoring your accounts receivables is not the same as taking out a loan. Rather than borrow money, you sell your unpaid invoices to a financing company. This may be necessary because your client will not pay for one to three months, but you need the income much sooner than that. A bank loan is not an option because the application would take too long and you might not even qualify. When the factoring company purchases your invoices, it advances you approximately 85 percent of their value. After your customers pay up, you receive the rest minus a factoring fee.

With recourse factoring, you are responsible to pay back the factor if your customer defaults. However, with nonrecourse factoring, you don’t have to repay unpaid invoices, but the fee is higher.

Advantages of Invoice Factoring

When you factor your invoices, you have the ability to offer your clients favorable payment terms but still maintain strong cash flow. You can obtain the cash you need quickly with this form of funding. The approval process is easier than for a traditional loan, because the factoring company is concerned with the credit history of your clients, not of your company. You are also not required to provide collateral for invoice factoring.

The Difference Between Invoice Factoring and Invoice Financing

Invoice factoring and invoice financing are both methods of funding involving your unpaid accounts receivables. However, invoice factoring involves selling your unpaid invoices to a factor, while invoice financing is a loan using your unpaid invoices as collateral.

For more advice on using invoice factoring to finance small businesses, contact Magis Funding.