Invoice Factoring: Hot to finance growth without debt or banks
There are few bigger challenges for business owners and managers
than waiting 30 to 60 days to get paid by their customers.
Although large businesses can usually afford it, smaller
businesses can’t afford the wait. As a matter of fact, waiting
to get paid on their invoices can create cash flow problems that
affect the owners ability to meet payroll or pay the company’s
bills. This problem can be more frustrating if the business has
a number of orders that it cannot fulfill because its cash is
tied up in unpaid invoices.
How can invoice factoring help you?
Invoice Factoring, also
known as accounts receivable
factoring, is a financial tool that allows small business
owners to capitalize on the power of their slow paying invoices.
It allows you to turn your invoices into immediate cash,
enabling you to fund your business operations. Although it is
not a well-known fact, invoices from strong credit worthy
commercial clients are excellent collateral, especially for
factoring companies. Although most banks won’t take invoices –
factoring companies are more than willing to provide you with
financing based on them. This makes it an ideal financing
vehicle for small and mid size businesses, as well as
knowledge-based companies and employee intensive firms.
How does invoice factoring work?
As opposed to most banks that lend you money against hard
collateral, invoice factoring companies buy your invoices
outright. The factoring company buys your invoices and provides
you with funds immediately, while they wait to get paid by your
customers. Factoring is best described with an example:
1. Let’s say that you sell services to Company A and Company B.
As soon as you provide the services, you invoice them.
2. At the same time, you send copies of the invoices to the
factoring company, who buys them and provides you with an
advance payment for them.
3. The factoring company waits to get paid by your customers.
Once paid, any remaining funds are remitted to your company.
The invoice factoring process can be repeated every time you
invoice, providing you with a flexible line of financing that
grows with your business.
How much will an invoice factor advance my business?
Factoring transactions are commonly done as a two-installment
sale. The first installment is called the advance and is paid to
you as soon as you submit the invoices. Advances can range
anywhere from 60% on the low end up to 90% of the gross value of
the invoices. The average advance is about 75%.
The remaining installment, called the rebate, is remitted to you
once the invoice is paid. Factoring fees are deducted from the
The cost of invoice factoring
The cost of a factoring transaction is determined by three
criteria. First, the credit worthiness of your customers.
Second, the length of time that your invoices take to get paid.
Lastly, the monthly factored volume.
Your cost, actually called a discount, can be as low as 1.5% or
as high as 12% per transaction depending on how you fit the
How can I determine if invoice factoring will help me?
Generally speaking, invoice factoring will help you if
you have a business that has reasonable profit margins or is
growing quickly. Mid size companies with 20% or more profit
margins or large companies with 15% profit margins can usually
do well with accounts receivable factoring.
About the author:
Invoice Factoring Group
and its small business invoice
factoring subsidiary can provide you with factoring quotes
at no cost to you. Marco Terry, its president, can be reached at