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Home » How to Use Invoice Factoring as Valuable Tool to Manage Cash Flow

How to Use Invoice Factoring as Valuable Tool to Manage Cash Flow

Running a business is a dream for many hard-working innovators, but a lot of people don’t realize how difficult it is to keep a business profitable at all times. Every now and then a business owner will find themselves in a financial struggle due to clients that take a long time to pay off the complete amount that you have billed them.

When dealing with such a hard situation that can impact the financial status of your business, it can get very easy to fall behind on paying your own bills and possibly consider taking out a loan from the bank. Those options will always lead to building up a debt that you don’t need, and shouldn’t have, to be in.

The good news is that you can solve these financial problems without harming your credit history or falling deep into debt. The solution is invoice factoring, which is a process that involves selling the unpaid invoices to a third party company to collect it for you.

Invoice factoring companies such as can be a choice for many different businesses in a variety of industries. It is commonly done by businesses that are in the medical industry but that shouldn’t stop you from using it as a financial tool to protect your business from losing money.

This guide can help you understand everything you need to know about invoice factoring and how it can benefit your business by having a steady cash flow.

What is invoice factoring and how does it work?

Factoring unpaid invoices is a great method to handle clients that take more than 30 days to pay you for services that you provided for them. Such clients can cause financial hardship for a business that needs constant income to keep offering their services for new customers.

Invoice factoring is a financial process that allows you to receive immediate cash by selling your unpaid invoices to a factoring company instead of waiting for months for the client to pay it off. Once you decide to factor your invoices, the factoring company will take away the responsibility of collecting the money from the client off of your shoulders.

The process of invoice factoring generally happens as the following:

Step 1: Submit your documents along with your application

Once you have done research on which factoring company you want to work with you will have to submit an application with documents that are required, which includes the unpaid invoices you want to factor.

Step 2: Wait for approval

After you submit your applications and the required documents, the factoring company will begin to review it within 3 to 5 business days. During this evaluation period, the factoring company will do a credit check for the clients whose invoices you submitted to factor, as well as confirming with the client that they received the services that you issued an invoice for.

Step 3: Receive immediate cash

Upon approval, the factoring company will pay you a certain percentage of the total invoice value. That percentage will be determined by the factoring company and it could be 70 to 95 percent. You will receive the first payment within 24 hours of approval.

Step 4: Collecting the money from the client

The factoring company will begin to collect the money from your client after approval. Depending on the factoring company, they will typically notify the client that they are now responsible for collecting the money they owe for the services you provided and they will be given a certain time period to pay it off, which can be 90 to 120 days.

Step 5: The final result of invoice factoring

Invoice factoring will either result in the client paying for the bill or the factoring company failing to collect that money. There could be many reasons that can cause the factoring company to become unable to receive the invoice money from the client such as bankruptcy or being dissatisfied with the services you provided.

If the factoring company collected the money successfully from the client, they will contact you to give you the rest of the payment from the invoice minus the factoring fee.

If the client is unable to pay the factoring company for whatever reason, you will be required to provide them for another invoice to factor to cover the cost of the money they gave you or return that payment back to them.

How can I choose the right factoring company for my business?

There are many factoring companies to choose from and it is important to learn what to look for before you start your search. Each invoice factoring company has its own terms, rates, and programs.

Here are the most important features to look for in a factoring company:

Provides recourse and non-recourse factoring options

There are two types of invoice factoring options, which are recourse and non-recourse. While recourse is the most common choice for factoring, it is important to find a factoring company that will give you both options.

Recourse factoring is an option that will not cost you a lot to sell your invoice but you will remain responsible if the client doesn’t pay for their bill. Non-recourse is often the most appealing choice, as it guarantees that you will keep the money you receive from the factoring company regardless if the client pays or not. The only downside to non-recourse factoring is that it will cost you more than the recourse option.

Allows flexibility and freedom when choosing invoices

Factoring companies have different rules when it comes to the volume of invoices that their clients are required to factor monthly. Find a factoring company that will give you freedom in choosing which invoices you want to sell and which clients’ invoices you want to keep for yourself.

You should not feel forced to factoring a large amount of unpaid invoices if you don’t want to. Check the factoring company’s terms before agreeing to sign a contract with them.

Gives you cash within 24 to 48 hours

The reason you are choosing to factoring your unpaid invoices is to receive fast cash, so why not look for a factoring company that guarantees that it will pay you within 24 to 48 hours?

Most invoice factoring companies will give you cash immediately after approval but it is crucial to make sure that you are going to get paid as fast as the promise and with absolute ease.

Do everything quickly while providing good communication

Factoring invoices is meant to be completely quick and easy including the approval process. Avoid factoring companies that have strict terms that can make you jump through endless hoops in order to get approved, as that will delay your ability to receive cash instantly.

When you are factoring invoices monthly, you need to be in contact with a representative from the factoring company who handles your account at all times. Excellent customer service is required while factoring your invoices, as you could run into a problem that needs immediate attention.

Find a factoring company that cares about communicating with their clients to update them about the status of their account and any outstanding invoices. After all, you are paying for them to maintain your factoring account.

Offers a flexible agreement

Some invoice factoring companies require their clients to sign a contract that determines the agreement between them. Typically, the contract is 6 months or a year long, which will depend on the amount of invoices you will want to factor.

If you don’t feel comfortable signing a contract with a factoring company until you use their services, it is best to search for one that offers contract flexibility or a month-to-month agreement.

Enjoys giving their customers additional services

Factoring invoices is a service that many companies can do properly but excellent customer service and ways to show appreciation to clients is not something that can be found everywhere.

A great invoice factoring company will give their clients additional services such as free credit checks on clients whose invoices you want to factor, provides 24/7 access to your account with them, and offers insurance assistance.

How can invoice factoring help my business?

Invoice factoring is a great financial tool to manage cash flow coming from selling your clients’ unpaid bills. Many businesses, no matter how big or small, rely heavily on receiving a steady flow of cash.

If you have a number of clients who are constantly late on paying you for the services you have provided for them, it is time to consider factoring those invoices to make sure that you are able to have enough money to pay off bills such as utility, rent, and maintenance.

Your financial obligation as a business owner also includes paying your employees for their hard work on time and never delaying their payroll. It is also an opportunity to expand your business by hiring more employees to accommodate a client’s needs and having the ability to grow your list of clientele as well.

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