How Does Invoice Factoring Differ from a Business Loan?
Factoring is not a traditional business loan – it's the sale of an asset (the invoice or receivable). Essentially, the factor is purchasing the right to collect on an invoice or receivable when it's paid, in return for a fee.
Because factors are counting on your customers to pay, they are more concerned with your customers' credibility. Factoring companies can collect payment either directly or indirectly from your customers. If your business has creditworthy customers, factoring could help your business get working capital upfront.
The goal is for your business to receive operating capital while waiting for customer payments. Factoring is very common in certain industries, such as transportation, staffing and wholesale.
How is Factoring Used to Improve Cash Flow?
Immediate funding from invoice financing can be used for a wide variety of ways to grow your business. Here are the most common ways business owners utilize the financing:
- Buying or leasing new equipment
- Payroll and taxes
- Operating expenses
- Hiring new employees
- Opening a new location
- Invest in advertising & marketing
- Covering gaps in cash flow
- Manage unanticipated business expenses