Small business owners with start-up companies tend to have limited financial resources, significant costs, minimal credit history, and a lot of questions. For many of those companies, the answer is invoice factoring.
What is invoice factoring?
Invoice factoring is a method of small business financing (also called “accounts receivable factoring”) whereby the start-up company sells its invoices to a factoring company (or “factor”) at a slight discount. The factor pays the start-up company up to 95% of the invoices’ face value, providing funding in just a day or two, whereas, had the start-up waited for the customer to pay, those funds might have been tied up in accounts receivable for 30, 60, or even 90 days.
How does invoice factoring help?
Invoice factoring does more than help start-up companies boost and manage cash flow by alleviating the typical 30- to 90-day wait times associated with direct customer payments. Invoice factoring services remove the need to bill and re-bill customers and spend excessive amounts of time managing invoices.
Additionally, invoice factoring helps start-up companies avoid debt. Small business loans are liabilities against start-ups. Invoice factoring allows invoices to be recorded as assets while increasing cash flow, all of which helps start-ups develop a strong credit history from the very beginning.
How does invoice factoring save my company money?
Beyond the reduction in time and personnel costs invoice financing provides, factoring also creates opportunities to save money. For example, many start-up companies have additional needs and costs, in addition to regular overhead. These may include expenses such as additional marketing, new equipment, needed tools, and additional personnel. That means every dollar needs to be carefully spent and every possible discount needs to be utilized.
One such discount is the “early pay discount,” sometimes called a “2/10, net-30 discount” provided by vendors, including those used by start-up companies. In short, these vendors provide services and offer their customers a discount, typically 2% of the invoice, if the invoice is paid in a shorter time frame: 10 days as opposed to 30. The ability to regularly save 2% on overhead costs can make a significant difference to a start-up company. Unfortunately, most start-ups are plagued by cash-flow challenges with their money tied up in accounts receivable for months. But for start-up companies using accounts receivable factoring, the process is smooth:
- Provide goods or services.
- Sell the associated invoices to the factoring company.
- Receive funding almost immediately.
- Use that funding to take advantage of “early pay discounts” from vendors.
Some companies take this system a step further by incorporating the factoring costs into their customer pricing whenever feasible. Additionally, while some companies view invoice factoring as a form of short-term financial assistance, many companies find financial success in factoring all of their invoices on an ongoing basis. The benefits are tremendous: reliable, fast payment of invoices; minimal costs or requirements; and the ability to budget, plan, and take advantage of vendor-offered discounts.
Invoice factoring through secure, dependable factoring companies (such as those who are members of Factors Against Fraud and The International Factoring Association) is a reliable, safe method of small business financing for start-up companies. And as those companies face ever-increasing challenges, factoring has become the ideal solution to cash-flow management.
Disclaimer: The information presented above is general and intended for educational purposes only. It is not a substitute for practical legal or accounting advice on any specific situation.
