One of the most important things for a healthy business is working capital. With cash on hand, you’re able to invest in growth, taking care of everything from website design to inventory purchases. Another vital way to protect your business is by having money ready to go in emergencies. Invoice factoring can help with both of these objectives.

What Is Invoice Factoring?

Factoring involves selling unpaid invoices to a factor, a business dedicated to this type of financing. Normally, you would have to wait 30–90 days for your customers to pay you. If you have urgent needs, however, you have to find a way to get financing more quickly. That’s where factoring invoices comes in handy.

When you factor an invoice, you sell it at a discount. Instead of receiving 100% of the profits, you generally receive about 70–75% up front and the rest once your customer has paid. The factoring company charges a small percentage of the invoice value as a fee, usually 1–3%. In return for this tradeoff, you get significant financing immediately.

How Can You Use Factoring for Your Business?

There are really no limits to how you use the capital obtained via this method. It’s your money, and you decide how to spend it. Many companies invest it in great opportunities. For example, if one of your suppliers is having a sale on inventory you normally buy, you can turn to factoring to get additional funds. That way, you can purchase a larger amount of inventory and maximize your savings.

Another great way to protect your business is to factor invoices during cash flow slowdowns. A slow month of sales doesn’t have to get you in hot water with your operations. You can get the capital needed right away to pay taxes, handle payroll, cover operating costs and keep your company running smoothly. For seasonal businesses, factoring is often a regular part of business operations.

What Are the Advantages of Factoring Compared to Other Financing?

One important benefit of factoring is that it’s easy. Getting qualified is simple because you don’t need excellent credit. Your current cash flow isn’t that important either — the whole reason a business chooses to factor is to improve cash flow.

Speed is another advantage. Once you’re set up, you can generally get financing in about 24 hours. That’s far faster than traditional loans or even working capital loans. When you use this type of financing, you have complete control over how much capital you need and when.