How to Determine if Invoice Factoring Aligns with Your Goals

You may have heard of Invoice Factoring or even witnessed its efficacy through previous experience. That said, it can be tough to determine whether the solution will align with your business’s goals. To assist you in making the right decision, we discuss what Invoice Factoring is, how it could benefit your company, and how to determine whether it’s the right solution for you.


What is Invoice Factoring?

Invoice Factoring is a financial service whereby a financer advances a portion of the business’s account receivable/s to the business, thereby freeing capital that is locked up in extended payment cycles. In essence, the account receivable/s is purchased by the factor. The advance is settled when the customer/s to whom the account receivable/s is invoiced settles the outstanding account. The reserve, or portion of the receivable/s that was not paid initially is then paid back, less the agreed lender discount fees.

This service benefits businesses with large transactional volumes, but low cash circulation. Unfortunately, many companies suffer from this issue – it’s common for customers to request payment terms that benefit them, but leave the supplier, manufacturer, wholesaler, or contractor to front the costs of the provision of the product or service, and subsequently suffer cash flow shortfalls.


What are the benefits of Invoice Factoring?

Invoice Factoring is designed to alleviate cash flow constraints. This is its primary benefit, as well as its core function. It allows businesses to instantly benefit from the sales/ transactions made with customers, where payment cycles may impair the business’s ability to fully leverage the value of the transaction/s. There are, of course, various other benefits too, including:


  • Fast and flexible: The process of acquiring an Invoice Factoring facility is simple and quick. Even first-time borrowers receive funds quickly when applying for Invoice Factoring. This is because the financing is secured by the receivable/s that is/ are funded, rather than through a business’s creditworthiness and/ or other forms of security. This subsequently shortens the application process, especially when the service is provided on an ongoing basis.
  • Creditworthiness is not a primary concern: Invoice Factoring is not considered a loan (at least in the traditional sense). It is an advance on outstanding cash flow. For this reason, a business’s creditworthiness, credit limits, and other factors that may impair the acquisition of finance through traditional lenders are not considered. Instead, factors such as a history of successful and timely payment of invoices from a borrower’s customers (those whom the receivables are outstanding with) are considered.
  • Increased opportunities for growth: By unlocking capital that is locked in your receivables, you are able to pursue growth when it presents itself. This includes receiving discounts from suppliers for early settlement, acquisition of new or larger customer accounts, increased marketing spending, and much more. In short, Invoice Factoring allows you to move from being a reactive business to being a proactive business!


Does Invoice Factoring align with your goals?

While the benefits of Invoice Factoring are numerous, the service may not align with your business goals, best practices, or specific needs. So, keeping the above benefits in mind, let’s discuss whether the service will suit you.

First, it is important to understand what the cash flow needs of your business are. Many businesses can thrive with a traditional revolving credit facility. Depending on the financer you partner with, you could receive advantageous loan terms. This is, however, something that mature, high-profit businesses can acquire. Younger or smaller businesses are typically subject to shorter payment cycles, higher interest rates, and other disadvantageous terms that could hurt their business over the long term. Subsequently, smaller, or financially receding businesses will likely find that Invoice Factoring aligns with their goals or needs. This is not to say, however, that larger businesses could not benefit from the service. Remember, traditional facilities are typically capped – many businesses encounter credit shortfalls during periods of rapid growth. Invoice Factoring can be coupled with other facilities (though only some) to bridge this gap (either short-term or long-term) to allow continuous, unhindered growth. No matter which end of the spectrum your business falls on, understanding your cash flow needs will allow you to determine how/ if Invoice Factoring can assist you.

Second, you should also consider the speed at which your business requires access to capital. While there are several ways to acquire capital fast, Invoice Factoring remains one of the most efficient ways to receive the cash you need, when you need it. Factors, and especially our team at EBF, understand that much of the value of Invoice Factoring as a service is derived from the speed at which the service is provided. If you need a fast, flexible solution to provide you with the capacity to pivot your business with trends and customer needs, Invoice Factoring may be the puzzle piece that your business is missing!

Finally, Factors take a personalized approach to the provision of the service, especially when compared to other forms of finance. This is because the provider acts as an extension of your business. It is in a factor’s best interest to see you prosper, meaning that you can leverage experience, counsel, and genuine care when you need it. If your business would benefit from the guidance of industry experts, you should seek out a partnership with EBF!


In summary:

Invoice Factoring is not for every business. Many will benefit greatly from traditional or alternative forms of finance – in fact, the reason there are so many finance options available to businesses is that each will present unique requirements. You should approach your finance acquisition with a deep understanding of your own business first, to ensure that your needs are met by the service you leverage.

If you require more information on Invoice Factoring or would simply like to receive advice on which finance option would best suit you, we welcome you to reach out to our team here.

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