Need Advice to Find Out if Invoice Factoring Is Right for You? Look No Further!
Factoring Invoices, sometimes called Account Receivables Factoring, is a financing option where businesses sell their invoices to an Invoice Factoring Company for a small fee or percentage in order to get cash right away rather than waiting for that invoice to be paid.
Though in theory any sizable business can use Invoice Factoring Services, in reality it works better for some businesses than it does for others. If you’re considering Factoring Invoices for your business’s financial solutions, we’ve compiled a brief overview so you can determine if Invoice Factoring is your best option.
Factoring Invoices Works Best for Certain Industries
Invoice Factoring is a better fit for industries such as manufacturing, oil & gas, construction & freight, telecommunications, textiles, payroll & financing services, and government contracting. In these sectors, it is more common to move a large lump sum of money at once to cover payroll, purchase new equipment or take advantage of a new opportunity. These industries tend to have feast or famine business cycles that make it hard to wait for payments to come in.
In addition, Account Receivables Factoring works best for business-to-business transactions rather than business-to-consumer ones so if you work in retail, Invoice Factoring may not be for you.
Are Your Customers Creditworthy? It Matters to an Invoice Factoring Company
If you want to get a business loan from a bank, the bank will run a credit check on your business. However, for Factoring Invoices, the Factoring Company will assess the credit worthiness of your clients. If you have a multitude of clients who mostly pay their bills on time, then you should be in good standing for Factoring Services.
Invoice Factoring: Ideal for Those with High Profit Margins & Low Cash Flow
If your business has a proven product or service, moderate-to-high profit margins, and monthly invoices that are regularly more than $25K, then you’re a good candidate for Business Invoice Factoring. When you use Invoice Factoring as a financing option, you’ll receive 90-99% of the value of the invoice. However, like any other loan or credit, this means that you’ll have to absorb that other 1-9%. Businesses with predictable, moderate-to-high profit margins are best positioned to do that.
Cash flow can be an issue for many companies with high profit margins. In this tepid economy, even your best customers can be slow to pay once and a while and orders may be flat. This down cycle can cause a chain reaction and soon you’re struggling to pay your own bills on time. For these reasons, Invoice Factoring may be a great option for those businesses that need cash right away despite being otherwise profitable. Expediency is one of the main reasons companies look to Account Receivables Factoring. If you have regular cash flow and can wait several weeks or months for your money, then you may choose a business loan instead of Factoring Services.