Is Invoice Factoring Right for Your Business?

Occasionally, businesses will stack up unpaid invoices, causing a shortage of funds in their operations. Unknown to many, unpaid invoices can be a secure and fast way of acquiring funds. Therefore, allowing business owners to eliminate interruptions in their daily activities.

Pros of Invoice Factoring

Viable Solution for Businesses With Low Credit

Low credit will often be a barrier to entry for businesses in need of traditional and alternative lending options, an area that invoice factoring can help with. For this option, lenders will often be interested in the quality of your invoices rather than your credit score, allowing you to benefit from this financing solution. With this, you can cater to any outstanding operational costs while allowing you to keep up with your growth needs.

Ease of Borrowing

Factoring allows you to borrow money even when previous invoices have not been paid. With this, you can get your funding easily, helping you take care of pending business operations.

Fast Funding

Unlike other traditional sources of funding, invoice factoring comes with a faster funding process. This allows you to access funds in as little as a day. Rather than waiting for the usual 30-day period for client payment.

Shift Liability

Once you sign up for factoring, your responsibility for collecting your clients’ payments shifts to your factors. This allows you to focus on other business areas rather than constantly monitoring late and missed payments.

Cons of Factoring

High-Interest Rates

Lenders who provide invoice factoring will often advance their loans with interest rates falling between the 1%-4% mark. This translates to about a 15%-35% annual rate, the equivalent to what other credit cards charge, which is higher than other alternative rates.

Minimal Eligibility Requirements

This financing option is only available to businesses that use invoices in their operations, cutting out others that do not use this for their payments.

Client Creditworthiness

While factoring is suitable for businesses with low credit, it will only come in handy for companies with clients that prove their creditworthiness.

Additional Fees

Unknown to numerous borrowers, lenders will often charge additional fees, increasing your overall costs. With this, you can expect expenses for late collections, wire transfers, and returned checks.