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Does your small business struggle from a lack of cash? This is a common issue that many startups face.
So what’s the solution to this problem? You should consider invoice factoring.
This is a service where an invoice factoring company provides you with cash upfront. They do this in exchange for collecting the invoice amounts from your clients later on.
You’ll pay them a small commission fee for their service. As such, you won’t get your full amount. Nevertheless, this can be a helpful service for many small businesses.
Here’s what you need to know about invoice factoring:
Let’s suppose you’re waiting on your client to pay you $2,000. You need this $2,000 to pay for your office space and your bill is due in 10 days.
You worry that they might not pay in time and you’ll get evicted from your office space. As such, you’ve got to find a way to get funding as fast as possible.
For small businesses, even a short period without cash flow can spell disaster. Your priority is to help your business survive while you plan to scale it.
An invoice factoring service will provide you with cash at a much faster rate than other business financing options such as a small business loan.
How Much Does Invoice Factoring Cost?
With an invoice factoring service, you’ll have to pay a fee that’s deducted from your cash advance. This is known as a factoring fee.
Let’s return to the scenario where you need $2,000. The invoice factoring fee might be around 5%*. This amount is $100 and that’s what’ll be deducted from your cash advance. The invoice factoring service owes you $1,900.
As a general rule, an invoice factoring service will give you 85% of the cash advance. You’ll receive the remainder (in this case, 10%) after the service collects the money from your clients.
So you’ll receive $1,615 in advance. Once the invoice factoring service receives the funds from your clients, you’ll receive the remaining $285.
It’s also possible that you might not receive the remaining amount if your clients never pay their invoices. As such, you want to be highly discerning when choosing your clients.
*The fee is dependent on your invoice factoring arrangement. Though some invoice factoring companies have a flat rate depending on your request.
Loans vs Invoice Factoring
The biggest advantage of invoice factoring is that you don’t have to pay the service back as they’ll collect from your clients.
With a loan, you’ll have to pay the loan service back even if your clients never end up paying you. Most likely, your loan will come with a high interest fee.
You also don’t have to put up any collateral for invoice factoring. It’s also rare for any business to get turned down for invoice factoring. As such, it’s a service you want to strongly consider using.
Use Invoice Factoring Today
Now you can consider using invoice factoring for your small business. Make sure you do your research on the best options for your business.
Consider using invoice factoring if you’ve faced frequent cash flow problems. You’ll eventually want to opt-out of the service, but you want to consider it during difficult times in your business.
For startups, it’s an invaluable tool as you work to scale your business. As such, we’d appreciate it if you shared this guide with other entrepreneurs.
You can find more great advice on entrepreneurship on our website.