The Benefits Of Invoice Factoring For Small Businesses, Explained


Are you a small business owner running on a shoestring budget?

If yes, you probably run out of working capital from time to time. When this happens, you’re left with no choice but to find ways to raise the money you need to keep the business operating normally. This can be even more frustrating if you’re sitting on unpaid invoices.

Instead of going in for a business loan or a business line of credit, both of which can take time and there’s no guarantee of approval, you can look into invoice factoring for small businesses.

In this article, we’re telling you more about invoice factoring and how it can benefit your business.

What Is Invoice Factoring?

Invoice factoring is the process of selling your business’s unpaid invoices to a factor. This is a third-party company that buys invoices and provides cash that’s usually up to a certain percentage of the unpaid amount.

For example, if you have an unpaid invoice worth $20,000, a factor can cash you about 80 to 90 per cent of the amount. Think of invoice factoring as an advance. It’s not a loan. Neither is it a line of credit.

Let’s turn our focus on the benefits of invoice factoring.

Get Quick Access to Cash

Did you know that 82 per cent of the small businesses that fail do so because they run into financial troubles? Running out of money is arguably the most common financial challenge for small enterprises.

If you’re staring at a cash crunch, you’re probably wondering where you’re going to raise money to keep the lights open. You could go into debt, but this takes time.

Invoice factoring gives you an opportunity to access cash quickly. As long as you have an unsettled invoice and everything checks out, a factor will advance you most of the money in a matter of hours.

Don’t Waste Your Time Chasing Clients

It’s frustrating when your business is in financial hardship yet you have clients who are not honoring their invoices. It’s not uncommon for clients to miss payment deadlines.

What do you do? Of course, the natural course of action is to get in touch with the clients and follow up on the unpaid invoices. This can take away your focus from running the business.

Or, out of frustration, you could get into unnecessary confrontations with your clients, which isn’t ideal for good client relations.

Invoice factoring comes in handy. When you pursue this option, you effectively sell your invoices to the factor. It becomes their job to follow up on the unpaid invoices from your clients. You must, however, inform your clients about this development.

Transfer of Credit Risk

An unpaid invoice is a credit risk to your company. If the client fails to settle it and files for bankruptcy, you may have no means to recoup your money.

Invoice factoring enables you to transfer the risk to the factor. Since the factor purchases the unpaid invoices, they assume the credit risk. If the client fails to pay, it’ll be the factor’s loss.

Invoice Factoring for Small Businesses Has Big Benefits

You might be hesitant about using invoice factoring for small businesses because the service comes at a cost you aren’t willing to pay. However, as we’ve demonstrated, there are big benefits. In fact, invoice factoring can save your business from the powerful jaws of a cash crush.

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