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: Finding Your Niche, Understanding Your Market & More

Business Video Roundup: Finding Your Niche, Understanding Your Market & More

In this week’s roundup of great videos for entrepreneurs and business owners, Era Transport CEO Sebastian Brzek discusses the difference between being the leader you want to be and being the leader that your team needs, Phanta founder Mark Drager gives advice on how to understand your market, and LightSpeed VT’s Brad Lea talks selling. Plus, the founder of Panera Bread shares the tough decision that turned his company around…

Mike Winters 18.01.2019

Houston Factoring Companies: Why Choose American Commercial Capital for Invoice Factoring?

Houston Factoring Companies: Why Choose American Commercial Capital for Invoice Factoring?

If you’re a Houston-based entrepreneur who has been searching for ways to improve your business cash flow and get the capital you need to grow, chances are you’ve come across a dozen Houston factoring companies who all claim to be the answer to all your problems. Invoice factoring, for those who don’t know, is when a business sells its accounts receivable (invoices) to a third-party company at a discount. Factoring…

Mike Winters 11.01.2019

Business Video Roundup: Direct-Mail Marketing in 2019, How Google Tests New Ideas & More

Business Video Roundup: Direct-Mail Marketing in 2019, How Google Tests New Ideas & More

As we settle into 2019, here are a few videos to help kickstart your way to success in the new year. Gary Vaynerchuk talks about why direct-mail marketing is far from dead, Evan Carmichael presents 10 habits to elevate your year, and Jake Knapp gives an inside look at Google’s five-step process for testing out new ideas and product concepts. Plus, Fear{less} host Tim Ferriss offers some quick productivity tips…

Mike Winters 4.01.2019
Back
AMERICAN COMMERCIAL CAPITAL HOME

HOW MUCH COULD FACTORING INCREASE PROFITS FOR YOUR BUSINESS?

CALL 713-227-3863