Invoice factoring is a type of alternative financing arrangement where a company sells unpaid customer invoices to a factoring company. Finance companies that offer factoring consider it more of an advance on future income rather than a loan. You should not have to offer any other form of collateral for this reason. If you are considering factoring for the first time, it is important to consider the pros and cons before contacting a factoring company.
Benefits of Invoice Factoring
Applying for a bank loan is often an exercise in patience. You need to submit numerous financial documents and then wait at least several weeks for the bank to approve or deny your loan. With such strict loan requirements, it can be challenging for startup companies or those with limited revenue to gain approval.
Factoring, on the other hand, involves completing only a short application. You should know almost immediately whether the factor approved your request and receive your funds within a matter of days. Remember that you will not receive the full value of the unpaid invoice because the factor holds some in escrow until the customer pays in full. The factoring company may also hold out fees before sending you the advance.
Factoring can be an excellent alternative when you need immediate access to cash to meet business expenses or pursue growth. This solution provides you with greater flexibility as well since you choose the invoices to factor.
Possible Drawbacks to Consider
Once you sell an invoice, the factoring company owns it and receives payment from the customer. This can present a privacy issue if you would prefer your customers not know that you needed an advance on their accounts receivable invoice. Relying on this type of financing too often can cut into your profit margin because fees and interest rates tend to be higher than they are with traditional bank loans. This shouldn’t be an issue for you if you can remain disciplined and pay the advance back quickly.
To learn whether factoring is the right choice for your small business, request an appointment with Whitefish Funding today.