Tapping the value in your invoices can be a great way to get the working capital you need whenever your cash on hand runs short. Whether it’s cash flow management, responding to an opportunity, or making your regular moves toward projected expansions, the benefit of using those invoices is the fact that you can put the money wherever you want. That just leaves one question. Do you use factoring or invoice financing?
Advantages To Invoice Financing
The first thing to acknowledge is that invoice financing is probably always the less expensive of the two options if you only count the cost in terms of the discount from face value that you take. Factors and AR financing agreements tend to offer similar access to working capital, but with the financing option you have a second-round payment coming as long as your customers pay on time or close to it. The financing firm collects the payment, deducts the advance and the fees relevant according to the fee schedule you agreed upon, and then any remainder is sent your way. If customers do pay late, then penalty fees could eat into or totally consume the second payment.
Advantages To Factoring
Factors offer you the simplicity of simply being done with the invoices you send out. Rather than financing them and tracking the final payment of each invoice and the second-round payment it qualifies for, you simply accept less than face value, selling the debt to the factor and moving it off your books. For the right businesses, this represents significant savings over the lower out-of-the-door price offered by AR financing because it eliminates the administrative work involved with following up on invoice reminders and logging items as you collect payment.
Which Is Best for Your Business?
If you are looking to streamline your administrative work and focus on your core business, factoring offers you the most benefit. If you’re looking to minimize the cost of capital to your business, then it is a simple matter of figuring out whether the labor you save is worth more than the lowered cost. In either case, the costs of the service can be folded into future quotes once you build a relationship with a single service provider whose fee structure becomes familiar to you. That way you can preserve your bottom line while working with customers who demand invoice billing because it suits their business cycle.