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What Does Invoice Factoring Really Cost Your Business?

by Olufisayo
Invoice Factoring

Invoice factoring is common in business. Yet it is an under-utilized tool because many people don’t know about the cost-benefit ratio or think it is too expensive. What does invoice factoring really cost your business? Before we answer this, let’s explain what invoice factoring entails.

What Is Invoice Factoring?

Invoice factoring is when you sell an invoice to a third party. They then have the right to collect on the debt. You choose which accounts receivables or invoices you will sell. They won’t pay you the full amount. Instead, there will be a small discount called a factor.  That’s why invoice factoring is also called invoice discounting.

The amount of the discount depends on how old the invoice is and the creditworthiness of the person or organization that owes the money.

How Much Does Invoice Factoring Cost?

Invoice factoring could cost anywhere from 5% to 30%. The factor increases along with the age of the invoice, so it is better to sell it off and get the cash you need at day 32 rather than spending six months trying to be paid. As time goes by, it isn’t uncommon for a business to be forced to take less than they were promised just to settle with the client. And that may be less than what you’d get from an invoice factoring firm.

How Does It Compare to the Alternatives?        

Invoice factoring is more reliable than trying to press slow-paying clients for payment. When you sell the debt, the other party takes on the responsibility of collecting it, while you get the cash. You can plan on when you give up trying to collect and sell the debt.

Invoice factoring is often cheaper than borrowing money to cover the cash crunch caused by slow-paying clients. Your personal credit doesn’t factor into the equation. The creditworthiness of the client who owes you money does.

Invoice factoring turns the money you are owed into an asset. You could get the money from the invoice advanced to you in a matter of days. This allows you to pay your bills, even though the client hasn’t paid you. It provides the working capital that allows you to pay for new inventory and make payroll without having to borrow money while waiting for the income to come in. Or you can use the money to pay your own suppliers on time.

Invoice factoring gives you a much more predictable cash flow. For example, you control when you sell the invoices. This means you can use invoice factoring for more reliable cash flow forecasting. Or you can use it to synchronize your revenue and expense cities. Furthermore, you’re eliminating the cost of pursuing people for the debt.

Invoice factoring may allow you to accept sizable orders with confidence because you have a plan for getting the money you’re owed as quickly as possible. It also allows you to take on larger but slower-paying customers. This has the side benefit of allowing you to expand and diversify your customer base.

Infographic provided by Seacoast Business Funding – invoice factoring services

Photo by Mikhail Nilov from Pexels

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