How Does Invoice Factoring Differ From a Business Loan?
Factoring isn’t a traditional small business loan — it’s alternative financing through the sale of an asset (the invoice amount or receivable). Essentially, the factor is purchasing the right to collect on an invoice or receivable when it’s paid for a fee.
Because financing companies are counting on your customers to pay, they’re more concerned with your customers’ credibility. Invoice factoring companies can collect payment directly or indirectly from your customers. Factoring could help your business get working capital upfront if your business has creditworthy customers.
Factoring providers generally offer recourse or nonrecourse factoring. With recourse factoring, it’s up to your company to settle the debt with your customer if an invoice is unpaid or late. With nonrecourse factoring, the factoring company absorbs the debt of the unpaid invoice or late payment. This will be clarified in your invoice factoring agreement.
The goal is for your business to receive operating capital while waiting for customer payments. Factoring is common in certain industries, such as trucking, staffing, and wholesale.
How Is Factoring Used To Improve Cash Flow?
Immediate funding from invoice financing can be used to grow your business. Here are the most common ways business owners use financing:
- Buying or leasing new equipment
- Payroll and taxes
- Operating expenses
- Hiring new employees
- Opening a new location
- Invest in advertising and marketing
- Assisting with cash flow problems
- Paying off credit card debt
- Managing unanticipated business expenses
- Pandemic-related costs