If your company has to invoice your customers on net terms, you’re probably all too familiar with slow-paying customers. Late paying customers can be a frustrating, yet inevitable part of running a business, but there are ways to get your invoices paid faster. The most common solutions to getting your invoices paid faster are invoice factoring and invoice discounting.
What is invoice factoring?
Invoice factoring is a financial transaction in which a business sells its invoices (otherwise known as accounts receivable, or AR) at a discount to an external financing company. That financing company is known as a "factor" or "factoring company." Factoring companies typically advance 70-90 percent of the invoice value upfront and then take their fee (between 2%-4% per month) when the invoice is paid.
What is invoice discounting?
Invoice discounting is another way to remedy the cash flow crunch caused by customers that are slow to pay their invoices, and discounting is similar to invoice factoring. The main difference is that, unlike factoring, the discount is offered directly to the customer. This invoice discount is an attempt to entice that customer to pay their invoice more quickly than they normally would.
What type of companies could benefit from invoice factoring?
- Startups — Invoice factoring offers flexible start-up finance to get your new company up on the right track
- Expanding businesses — Invoice factoring puts your cash to work for your business as soon as you’ve earned it.
- Businesses experiencing cash flow crunch — Invoice factoring can close the gap while waiting for customers to pay their invoices
Why is invoice factoring the best solution for my company?
Factoring is an effective solution if your company doesn’t have the resources, time, or staff to focus on the discounting and prodding of a customer to entice them to pay their invoices more quickly. It takes away the stress of chasing down payments and removes cash flow stress. In addition, unlike discounting, factoring will always result in an invoice payment upfront. Additionally, it will not impact your credit because it's the purchase of an asset (the invoice) instead of a loan. Because factoring is not a loan, it doesn't appear on your balance sheet as an expense. You get the benefit of improved cash flow without the downside.
Is invoice factoring effective for large and small businesses?
No matter the size of your company, or your specific industry, invoice factoring can provide the resources to help your company with flexible cash flow while allowing you to focus on running your business. Factoring can help startups get off the ground and become established, and help larger businesses expand, diversify, and meet their growth targets.