What You Should Know About Invoice Factoring

Your cash flow can directly impact the success of your business. If you have an overabundance, you can reinvest in new equipment, hiring staff, or new projects, but if you are short, you will find it difficult to meet your weekly and monthly obligations. However, at some point, most businesses run short on their cash flows. This is what you should know about factoring and how it can help.

Invoice Overview

If you allow your customers to purchase your products on credit, you will produce invoices (sales) that have not been paid. These are your accounts receivable. Although they look great on your balance sheet because they increase your assets, if they aren’t paid right away, they can be detrimental to your company. Therefore, you need a solid accounts receivable policy and process. However, what if you need the money sooner?

Factoring Defined

If you need money sooner than you can collect it from your customers, you can sell your invoices to a factor (a company that buys invoices) at a discount. The key is that you receive the money immediately, even if it isn’t as much as you would receive in the long run. This money can be used to pay bills during slow periods, purchase raw materials for large orders, or pay unexpected expenses. The factoring company then collects the invoices. This practice is especially beneficial if you have slow-paying customers.

Types of Businesses Use This Process

Any business that has accounts receivable can work with a factoring company. This is especially true if our organization operates in the business-to-business sector. Major industries, such as government contractors, marketing, media, transportation, and others are regular participants.

Customer Non-Payment

You may be asking what happens if your customers don’t pay their bills. This depends on the type of contract you have with your factor. If you have a non-recourse option, the factoring company writes off the debt if your customers don’t pay. However, you may still be responsible for bills that result from you not fulfilling the customer’s order. In addition, you will receive less on your invoices from the factoring company due to the increased risk.

A recourse factor places the risk on you. You receive more initially from your factoring company, but you will be responsible if your customers do not pay their invoices.

Weigh the pros and cons before you contact a factoring company to sell your invoices.