Invoice factoring influences the growth of a business without the risk of debt and diluting of assets. It is a form of funding that allows businesses to acquire cash immediately.
Also known as accounts receivable factoring, this is where a business sell its invoices or account receivables to a third party at a discount. The third parties are referred to as debt factoring companies. The factoring costs are directly related to the business cycle making this a flexible way of obtaining capital. However, the business owner only loses a little value of the invoices since the factoring company pays less money than the face value of the invoice.
Most business owners use factoring to get immediate funds, improve cash flow, and avoid the hassles involved in collecting bad debts and to also borrow money secured against outstanding invoices held by the business. This makes it easier for the business to access outstanding debts thus increasing the working capital while growing the business rapidly. This money could also be used for other business start ups or projects that require more capital.
While it may seem like an easy task, invoice factoring works well when a business is run with few issues over invoices. Such disputes can slow down or delay the release of cash flow. As a business owner, other things to consider include; the charges involved in factoring services, some clients may prefer to work directly with you and some debt factors may decide to vet your clients which may affect your business. The debt factor you use will affect how clients regard your business.
Invoice factoring may be an easy and fast way to turn your invoices to cash but it also comes with disadvantages. The main ones include cost; which may vary depending on the invoices and also the ability to borrow money from other sources will be reduced.