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Article: Small Business Invoice Factoring

If you sell products and services to commercial customers, you often have to wait four to eight weeks before your invoices are paid. Likewise, if you also sell to government agencies, you will find that most of your invoices will also be paid slowly. It’s a fact of business: large companies and government agencies pay their invoices slowly – for two reasons:

  1. They have large bureaucracies and long approval processes
  2. Slow payments enable them to use your products – for free – for up to two months

Many large companies have resources, either funds in the bank or access to credit, to handle slow-paying invoices without a problem. But small business owners face a different reality, and they often don’t have the resources to wait for payment. Or worse, they did not account for slow-paying invoices when they took the client, and they now face a crunch. As you can imagine, this crunch can be a recipe for financial disaster. But there is a solution: you can finance your invoices.

By financing your invoices, you improve your cash flow and get funds to pay for expenses. And if you use financing correctly, your cash flow may look as good as if your clients were paying quickly. You get many of the benefits of quick-paying clients without actually requiring them to pay their invoices sooner.

Factoring (as invoice financing is known) can provide you with immediate funds, often 24 hours after you invoice a client. The transaction works like this:

  • You deliver your product or a service to the client and then invoice the client.
  • You submit the invoice to your client and send a copy of the invoice to the finance company.
  • The company advances you up to 85% of your invoice (this varies by industry).
  • The remaining 15% is held as a reserve to cover charge backs and credits.
  • When your client pays the factor, the transaction is settled and the reserve is rebated (less a small fee).

The cost of this service varies based on your business volume, how long your clients take to pay, and their creditworthiness. On average, most factors charge from 1.15% to 3% for every 30 days that the invoice is outstanding. Fee schedules vary and can usually be customized to fit your needs.

An important difference between invoice factoring and a conventional business loan is that factoring is easier to get. Since the factor is funding your invoices, their main concern is that you do business with financially stable clients who pay their invoices on time – albeit slowly. Therefore, factoring is available to small and new businesses, provided that you have good clients. And, unlike banks, factoring companies do not request endless financial reports and three years’ worth of audited financial statements.

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