What Is Invoice Factoring? (And How Factoring Can Help Your Business Grow)

Posted on 5.March.2015 by Mike Winters | @amcomcap

What Is Invoice Factoring?Invoice factoring is a type of business financing unfamiliar to many small business owners. It provides a business with working capital and solves cash-flow problems, but it’s not like a bank loan or credit. So let’s break down invoice factoring and explain exactly what it is and how it can benefit your business.

So, what the heck is invoice factoring?

Invoice factoring is when a business sells its accounts receivable (invoices) to a third-party company at a discount. Factoring helps prevent business cash-flow problems by allowing a business to get paid on invoices almost immediately — much sooner than waiting the typical 30 to 90 days for a client payment. Accounts receivable factoring can therefore eliminate business cash-flow restrictions, providing a consistent cash flow that’s not interrupted by waiting on clients to pay their invoices. Ultimately, invoice factoring gives a business the power to grow.

Once a business has sold its accounts receivable or invoices to the factoring company, the factoring company handles all the collection and payment processing. This is a tremendous help to small businesses because they don’t have to spend any time or effort making collection calls, managing payments, and ensuring that cash keeps flowing uninterrupted. The factoring company saves the business from this burden and keeps cash flow steady.

My business can’t get a bank loan. Is factoring a possibility?

Absolutely. A bank makes a loan based on the credit-worthiness of the entity requesting the loan, so it’s difficult for startups and small businesses to secure a loan without any collateral. Factoring is different. A factoring company examines your clients for credit decisions, so if you’re selling to credit-worthy customers you’re ready to go. Selling your invoices to a factoring company keeps your cash flow consistent, allowing your business to keep its vendors satisfied and providing your business the funding it needs to grow.

Wait, this sounds too good to be true. How does the factoring company make money?

A factoring company gets a small fee when an invoice is collected. That’s it.

To break it down into three steps, here’s how it works with a typical factoring company:

  1. You sell your invoice(s) to the factoring company at 70% to 80% of the invoice amount (this means you get up to 80% of the invoice within 24 hours!).
  2. Now it’s in the factoring company’s hands: they collect on the invoice(s) from the client.
  3. Then the factoring company sends you the remaining 20% to 30% of the invoice amount, minus a small fee.

That small fee (usually around 5% of the invoice) is how the factoring company makes money.

Is invoice factoring a good idea for my business?

Probably. Factoring is perfect for growing small businesses with good profit margins, especially ones that are unable to obtain traditional bank financing. Factoring can provide a consistent cash flow, enabling you to pay your employees and vendors on time and put funds towards new sales orders or growth that you would otherwise lack the cash flow to finance. Factoring gives you the freedom and power to grow your business without any cash-flow restrictions.

image description

Roy Brooks and American Commercial Capital, LLC, has provided invoice-factoring services to Houston-area small businesses since 2003. We work with businesses in San Antonio, Dallas, Austin, Fort Worth, Beaumont, Port Arthur, Corpus Christi, and other nearby Texas cities.

If you want to learn more about how cashflow-sensitive invoice factoring can help your business, give us a call at 713-227-3863, contact us here, or fill out our form for a free, no-obligation quote.

READ MORE FROM AMERICAN COMMERCIAL CAPITAL

Business Video Roundup: Re-Opening Your Business, Marketing & Skyrocketing Your Sales

Business Video Roundup: Re-Opening Your Business, Marketing & Skyrocketing Your Sales

In this week’s roundup of great videos for entrepreneurs and business owners, Patrick Bet-David lays down nine obstacles every entrepreneur will face (and how to overcome them), Gary Vaynerchuk welcomes Liquid IV CEO Brandin Cohen to the latest episode of Coffee & Commerce, and Stanford Graduate School of Business hosts a View from the Top conversation with Netflix’s Global Chief Marketing Officer, Bozoma Saint John. Plus, Marie Forleo has three…

Mike Winters 16.04.2021

Business Video Roundup: How to Find a Great Business Partner, Nurture Employees & More

Business Video Roundup: How to Find a Great Business Partner, Nurture Employees & More

In this week’s business video roundup, Patrick Bet-David breaks down how to find a great business partner, Gary Vaynerchuk and Beth Weissenberger talk about how to create a work environment and company culture that fosters high employee morale, and CNBC explores whether it’s beneficial for restaurants to partner with popular third-party delivery apps like DoorDash and UberEats (the answer is complicated). Plus, CNBC also looks into how the Texas winter…

Mike Winters 2.04.2021

Business Video Roundup: Build Your Inner Circle, What’s Ahead for the U.S. Economy & More

Business Video Roundup: Build Your Inner Circle, What’s Ahead for the U.S. Economy & More

In this week’s roundup of great videos for entrepreneurs and business owners, Gary Vaynerchuk welcomes streetwear moguls Ben and Bobby Hundreds to the latest episode of Coffee & Commerce, Business Insider tells the story of a family-owned Japanese business that has survived more than 25 generations and 1,000 years, and CNBC looks into how China came to dominate the electric vehicle market—and whether the U.S. can hope to catch up.…

Mike Winters 26.03.2021
Back
AMERICAN COMMERCIAL CAPITAL HOME

HOW MUCH COULD FACTORING INCREASE PROFITS FOR YOUR BUSINESS?

CALL 713-227-3863