A Beginner’s Guide to Invoice Factoring

Factoring has become one of the most popular ways for small companies to regulate cash flow and keep budgetary goals in check, and when you structure your administrative operations around its regular use, you can save money in ways that help offset the cost of the service. If you run a business on an invoice billing model but have never used this service, there are a few things to know before you apply to help yourself get a faster approval for a higher percentage of your invoice’s face value.

Using a Factor vs. Financing Accounts

The biggest difference between a cash advance based on your invoice pool’s value and a factoring arrangement is the finality, since the latter is essentially the same as selling the invoices. Cash advances are just that. Some hold your business accountable if customers do not pay, others have harsh fee schedules that increase your costs on the fly.

When you sell invoices, however, you are done with them. There is no recourse if customers do not pay, and the cost of recovering money from slow-paying customers does not fall to you either. That is why you accept less than the full value for your invoices, to offset the risks and account for the work done by the firm buying them.

Factoring Applications vs. Loan Applications

Your invoices are the stars of the show when you are using them to access working capital, so the rest of the material you send is typically designed to support the claims made by them. That typically means confirmation of your basic identifying information like your tax ID number, business license, and general liability insurance. It also means submitting your receivables ledger history and supporting financial statements that show your customers’ repayment habits.

If you supply all the necessary material up front, it should only take a day or two to get preliminary approval and offer. From there you may need to supply some additional documentation while negotiating the final costs, but that phase is very different from one lender to another. Some haggle quite a bit while getting to know you, others have very firm fees they later discount for repeat customers with clients in good standing.

Ready to Apply?

Factoring as a regular method of outsourcing your invoice collection process has become very popular with small companies over the past few decades. From freelancers operating as one-person companies to service businesses with lean payroll operations focused on those with technical skills in the trade, there are a lot of companies using the service to simplify backend administrative work.