Receivables play an important role in maintaining healthy accounts. To ensure that you stay on top of your accounts, you need faster payments for your sales invoices. However, making collection calls and reviewing receivables isn't an easy task, and it often takes a lot of time that might negatively impact your company's productivity. Fortunately, invoice factoring enables faster payment for your sales invoices.

But first thing first; what is invoice factoring, and how does it benefit businesses? Read on to find out more about it and the key benefits it can provide to your business.

What's Invoice Factoring?

Invoice factoring is a finance solution offered by invoice finance brokers to assist businesses to leverage unpaid invoices, helping them to improve their cash flow.

With this option you have an experienced invoice factoring company handling your companies invoices. The company pays your invoices instantly and later collects the money from your clients. However, the factoring company deducts a small fee and a percentage of the total invoices that is retained until your clients settle the invoice.

Invoice Factoring: What Are The Benefits?

Though the factoring company pays your sales invoices in advance, factoring is different from a regular loan. The company buys your sales invoice at a discount. The difference between invoice factoring and a loan manifest is even easier to see if you look at the benefits of factoring.

1. Faster Access To Cash

Among the most important aspects of managing cash flow that you should understand is that your business is owed enough to meet its commitments. In such circumstances, as a business owner, you can't pay your bills since your clients have taken advantage of your credit terms. If you factor your invoices, you have faster access to cash since you get to receive your invoice's value in one or two days. This solution ensures that your business runs efficiently by eliminating the time lag between invoicing and receiving payments from your clients.

2. No Collateral Needed

Unlike most funding solutions such as loans and lines of credit, which require collaterals such as real estate before lending you the money, invoice factoring doesn't require additional collaterals. You only need to present the unpaid invoices, which themselves act as collateral for the invoice factoring.

3. No Equity Required

Invoice factoring doesn't require equity, so business owners don't have to surrender a part of their business or allow any business to have control over the factoring company. With invoice factoring, time determines the relationship between your business and the factoring company. Upon the end of the contract, the relationship is terminated unless you renew the contract.

4. Flexible Terms

Factoring companies usually offer more flexible terms. This helps the business owner set an invoice factoring arrangement that is suitable to them. With invoice factoring, you're at liberty to choose which invoices you need to factor, and you're not compelled into signing a long-term contract. However, while factoring companies can handle most invoices, some may not be willing to factor some invoices, such as annual licensing fees in advance.

5. Increased Profits

Most businesses agree that invoice factoring helps increase profits. Invoice factoring enables you to pay vendors in time; hence you can negotiate better terms with your suppliers. Additionally, with invoice factoring, you have the opportunity to make early settlement discounts, which is hugely beneficial for your company. With the availability of cash, you can also invest in new business opportunities or boost your business.

6. Smooth Cash Flow

Since invoice factoring enables you to receive cash for your unpaid invoices immediately, it's not hard to manage cash flow. Your company's productivity isn't financially affected since your main clients haven't completed their payments. The smooth cash flow resulting from invoice factoring also enables you to make timely suppliers' payments, hence eradicating time wasted giving excuses to suppliers or dividing the available cash.

7. No More Waiting To Get Paid

One example of factoring is freight bill factoring. Here, instead of waiting for one or two months to receive payments for your invoices, the factoring company converts your receivable accounts into cash. During this process, freight companies do the waiting as you continue with your business as usual. The following are some of the ways that your business benefit from no waiting period as a result of freight bill factoring:

Business operations aren't affected by a backlog on accounts receivables

There are no incurred debts since the business has a smooth cash flow

There's a smooth flow of freight transactions

8. No Restrictions

Invoice factoring returns aren't subjected to any restriction. Your business gets to decide on how to use the money. Unlike with somebusiness loans whereby you have to spend on what you borrowed for, with invoice factoring, you're at liberty to use your money whichever way you like.

9. Cost-Effective

In past years, invoice factoring has garnered a bad reputation for being among the most expensive financing solutions. However, factoring costs have decreased in recent years. Nowadays, the cost of factoring depends on various things, such as the type of industry you're involved in, your clients' creditworthiness, and the value and volume of your invoices. For instance, you can receive an advance of 95% of your sales invoice at a factoring fee of 1.5%.

10. Increase Sales

It's normal for small businesses to be reluctant to offer credit since they can't afford to wait until they get paid. However, most potential clients would want to work with companies offering credit. With invoice factoring, you can offer credit and continue running your business since you instantly get the value of your sales invoices. With the ability of your company to offer credit, you're more likely to attract multiple potential clients, leading to increased sales.

Conclusion

Invoice factoring is an ideal financial solution for companies looking forward to getting the value of their sales invoices without delays. The cash availability resulting from factoring offers more advantages for any business, whether small or big. One of the major benefits is that factoring isn't the same as lending; therefore, your balance sheet won't be negatively affected. Though there is a cost for factoring, the benefits it provides more than makes up for it.