Traditional loans aren’t the only way you can fund business needs. Alternative lending methods such as invoice factoring are popular with small business owners. Before you get started with this helpful financing option, knowing the benefits can help you decide if it’s right for you.
The Benefits of Factoring Invoices
There are many reasons why using your invoices as valuable assets is smart for your business:
One of the main advantages of using a factor over term loans is how quickly you can get the capital your business needs. While many loans can take weeks or months from application to approval, with factored invoices you receive capital almost immediately. In fact, processing often takes 24 hours or less. This makes it a practical and flexible solution for almost any business situation.
Strong Business Growth
Having access to additional capital is good for your company. If you rely only on what you have in your business savings account, you may be tempted to hold off on new projects for fear of future problems. With merchant cash advances from factored invoices, you have the freedom to invest in every area of your company, from online marketing to high-quality equipment.
Easy Application Process
Term loans often have stringent financial requirements that look at your business records, credit history and time operating. New companies or owners with less-than-stellar credit may have a harder time getting financing. However, with factors, all that matters is the value of your invoices and the quality of your customers. This makes it much easier to qualify for advances, even if you’re still working on building your credit.
Freedom To Focus on Your Business
With certain types of factoring, you essentially outsource your accounts receivables department to a third-party lender. This gives you continual access to lines of credit for day-to-day business operations while also minimizing your time investment. You don’t have to worry about collecting on invoices at all, so you can concentrate on building a great relationship with your customers instead.
How Invoice Factoring Work
The basic idea behind this alternative financing method is to “sell” unpaid invoices to a trustworthy lender. This lender, called a factor, takes care of collection on the bill. In exchange, your business receives a large portion of the invoice value immediately — usually around 80% — and the rest once payment is made. The factor keeps a small percentage in exchange for these services.
Designed as short-term financing, this option may have higher interest rates compared to long-term loans. However, due to the many benefits offered, factoring continues to be an excellent way to obtain liquid capital.