Small business invoice factoring is a type of accounts receivable financing in which you sell your unpaid invoices to a factoring company for a fee. In return, the factoring company gives you a cash advance within a few business days and waits on your customer to pay the outstanding invoice according to the original payment terms. You get put your funding to work and get back to business.
What Is Invoice Financing for Small Businesses?
Invoice financing is a type of business financing where a small business sells its outstanding invoices or accounts receivable to a third-party financing company, also known as a factor, at a discount. In return, the factor provides you with an advance of the full amount of the outstanding invoice.
You repay the factoring company for the advance (plus their fee) over a period of time, usually with weekly or monthly payments. You continue to work with your client on collecting payment. This allows you to receive an immediate cash flow injection, rather than waiting for slow-paying customers to pay their outstanding invoices.
How Do Invoice Factoring and Invoice Financing Help Small Businesses?
The short answer: Invoice factoring and invoice financing help solve the cash crunch that small businesses often face.
The more detailed answer is that these funding methods smooth out any cash flow gaps your business might experience due to a number of issues — the biggest one being late payments or lengthy net payment terms. Invoice factoring and financing also help your small business grow by giving you a flexible funding boost when you need it. This is especially important when it comes to bidding on new business or taking on a growth opportunity. You get peace of mind that you’ll be able to meet the demands of larger projects.
In addition, small business factoring in particular helps you grow your business without taking on any debt or giving away equity in your business. You’re simply getting paid for work you’ve already done that’s tied up in accounts receivable. Small business factoring is not a loan, and it’s not another business purchasing a stake in your company, it’s just an advance on unpaid invoices. Small business invoice financing helps in much the same ways that invoice factoring does.
However, in our experience with our clients, invoice factoring can provide added value to businesses by freeing up admin time and cost from not having to manage accounts receivable. Additionally, because invoice factoring is not a loan – unlike invoice financing – it doesn’t show up on your balance sheet as a liability.