Pros and cons of invoice factoring

One method of increasing cash flow that is becoming increasingly popular is invoice factoring. As traditional financing becomes harder to get, many companies are turning to invoice factoring to get the capital they need for growth, buying needed materials and equipment, and paying employees. Invoice factoring is when a company sells its uncollected invoices to a third party. The factoring company buys these assets, usually at a discount, and advances the business the needed cash. The factoring company is then responsible for collecting on the invoices. However, it usually hedges by only advancing you 75-80 percent of an invoice's value. The rest is sent to you (less fees) after the customer pays the invoice.

Advantages of invoice factoring

Many businesses find that there are some definite upsides to factoring, especially in terms of cash flow. Some of the advantages to invoice factoring include:

• It is easier to get money this way than through loan financing from a bank
• Provides instant capital needed for your business
• Allows your business to keep a more stable cash flow, even during slow times
• Saves you the time associated with collecting on an invoice

Disadvantages of factoring invoices

Of course there are downsides to the practice of invoice factoring:

• Fees can be high
• Sometimes a factoring company won't accept an invoice it thinks is too risky
• Customers may be put off when they see a factoring company on the invoice
• You do not get the entire amount of the invoice

Choosing a factoring company to work with

Before choosing a factoring company, make sure it is reliable, professional and experienced. Remember that your customers will have to deal with the factoring company. Indeed, most customers will consider the one you choose to be a representative of your business. It is important that you choose a company whose employees are courteous, helpful and professional. Check references and consult the Better Business Bureau to ensure that you are dealing with a reputable company.

If you feel that the pros outweigh the cons of invoice factoring, you'll need to find several factoring companies to compare. BuyerZone can match you to up to 5 different invoice factoring services, completely free – just answer a few simple questions about your business and you'll be on your way to quick cash for your business.