May 18, 2022

Invoice factoring: Is it right for my business?


If you’re a B2B business owner, you’ve probably got a stack of unpaid customer invoices lying around—that’s just the way the cookie crumbles. And although it can be frustrating waiting for these remaining balances to be paid off (especially if you’ve run into issues with working capital), there is one advantage to these unpaid invoices: a method of financing called invoice factoring. This is a great option for B2B business owners looking to increase cash flow while they wait for customer payments. 

What is invoice factoring? 

The first thing to understand about invoice factoring is that it is not a business loan. It refers to the selling of invoices at a discounted rate to a factoring company in exchange for a lump sum. The factoring company then takes ownership of the invoices, meaning they’re now the ones in charge of the payment process. You receive a percentage of the invoices and you’re off the hook in terms of collecting payment from your customers. 

How does invoice factoring work?

Let’s say you have a $10,000 invoice and your customer has agreed to pay it within 30 days. All is fine until you encounter an unexpected cash flow problem, resulting in the need for working capital sooner than expected. Sound familiar? This kind of situation happens all the time in business. 

A potential fix to this problem is to apply for a bank or small business loan, but Founders with less than stellar credit may find this route challenging. Plus, bank loans can take several months to process, meaning you won’t solve your immediate cash flow hiccough. That’s why many Founders turn to invoice factoring as a quick fix to their cash flow shortfalls. 

The basic process works like this:

  1. You sell your outstanding invoices to a factoring company in exchange for a lump sum—usually somewhere between 70 and 90 percent of the total. 
  2. The factoring company charges a factoring fee or discount rate, usually between 1 and 5 percent of the total.
  3. The factoring company advances you the cash advance in a lump sum, which is sent directly to your bank account. This money can now be used immediately. 

What types of businesses use invoice factoring?

Generally speaking, invoice factoring is used by businesses that sell products or services to other businesses. These can include (but are not limited to) the following sectors:

  • Transportation
  • Staffing
  • Manufacturing
  • Wholesale
  • Healthcare 
  • Technology
  • Service providers

What are the advantages of invoice factoring? 

There are a number of reasons why Founders would consider leveraging invoice factoring as a means of financing their business. It can be a quick fix for cash flow snags, and can be especially beneficial to businesses that simply don’t have the luxury of waiting months for a bank loan to come in. Unlike traditional financing which often comes with stipulations on how you can spend the cash, money from invoice factoring can be spent however you want. This includes purchasing inventory, repairing equipment, investing in advertising and marketing, and scaling your company.