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If your business has cash flow problems, one option that can provide an immediate cash infusion into your business is to sell your accounts receivable.
Selling receivables is called invoice factoring, an alternative financing solution aimed primarily to improve a company’s cash flow and liquidity.
But factoring, as with other alternative lending options, is not as commonly understood as your typical business loan. So let’s talk more about why so many business owners—particularly small business owners—choose to sell their accounts receivable.
When selling receivables, you’re sending outstanding invoices to a third-party factoring company (also known as a “factor”) in exchange for an immediate cash advance of up to 80-90% of the value of each invoice. Your customer then pays the factor, rather than your business, when they are ready to pay the invoice.
Once the invoice is paid and processed by the factor, the remaining value of the invoice is released to your business, minus a small factoring fee. This process is known as invoice factoring.
The main reason for selling your accounts receivable is to provide your business with more predictable cash flow and to help make your business cash flow positive overall, especially if your company is struggling to stay afloat due to long payment terms. Selling accounts receivable also protects your cash flow from being hindered by slow-paying customers. With instant funds via the cash advance, you can settle other urgent business expenses.
Selling accounts receivable is a great alternative if you need funding but have been declined by a bank traditional loan. A company struggling with nonexistent business credit, poor credit or problems in their financial history, like bankruptcies, should view selling accounts receivable as a great alternative too.
If your business does receive a bank loan, but it’s not enough to solve your working capital problems, you can also turn to factoring for additional capital. And for businesses that do not want to incur any additional debt, selling your receivables is a smart option to get cash fast without creating future problems.
Selling your accounts receivable to further finance your business can be extremely beneficial, particularly for small business owners or those whose businesses are undergoing rapid change or dynamic growth. Let’s take a look at the advantages and disadvantages of selling your receivables.
| Pros of Selling Receivables | Cons of Selling Receivables |
| Quickly Improves Cash Flow | Fees Will Slightly Lower Profits |
| Flexible Form of Financing | Risk of Customer Non-Payment Remains |
| Minimal Restrictions for Usage of Funds | Debtors Must Have Sufficient Credit Score to Qualify |
| Not a Loan – So Does Not Incur Debt | Stigma Surrounding Invoice Factoring |
| No Collateral Required |
There are some significant benefits for those who choose to sell their A/R.
It Rapidly Improves Your Cash Flow
The primary purpose of factoring is to improve your cash flow. You don’t have to wait for clients to pay their invoices to earn a profit. Instead, the factoring company purchases your business’s invoices at a discount, sends you an advance payment for the invoices, and collects their payment when your customers pay.
The cash flow is predictable, too, so it takes away much of the worry you experience waiting for your customers to pay.
Flexible Form of Financing
Factoring works well for growing companies because you can adjust the volume of invoices sold as your business expands. Plus, you get to choose which invoices to sell, so you can focus on selling and earning from slow-paying customers while retaining the total profits from your clients that pay quickly.
Minimal Restrictions for How You Can Use the Funds
Once you receive capital from the factoring company, you can use it in nearly any way that you would like (with the exception of purchasing expensive equipment), whether you need it to finance payroll, inventory, rent, or any other business expenditures you have.
Does Not Incur Additional Debt
Invoice factoring is not a loan, as factoring companies simply purchase your AR at a discounted rate, so selling receivables adds zero debt to your business’s records. Therefore, you can earn instant cash flow without worrying about how it will affect your finances years later.
No Collateral Required
No need to stress over sacrificing and potentially losing valuable assets. When selling your receivables, a factoring company like altLINE won’t require collateral.
In the rare instance your customer never ends up paying the invoice, a good and honest factoring company will work with you to the most ideal, fair solution for both parties.
Support for Your A/R Department
After you finish the onboarding process with a factoring company, they will assist your A/R department with management and collections. This assistance allows your business to focus on its core goals. However, this support may also become a disadvantage because you give up some control of your business’s customer relations.
As with any financing option, factoring has a few potential downsides that you need to consider before you commit to it.
Additional Fees That Slightly Affect Profit Margin
There are two types of fees you will encounter in factoring: invoice-dependent factoring fees and administrative fees.
A factoring company determines your invoice-related fees based on the number of invoices you are selling and the credit of your clients. You agree upon these fees at the start of your relationship with the factoring company.
Risk of Customer Non-Payment Remains
Selling your accounts receivable doesn’t necessarily alter the chances that your customer pays on-time – or pays at all. Unless you’re utilizing non-recourse factoring, you’ll be held liable for failed customer payment, just as you would if you hadn’t factored the invoice.
Factoring companies understand this is out of your control, and you should expect them to do their best to work with you to find the best solution going forward, but it’s something to be aware of. Since they provided you an advance for the invoice, they expect to receive payment from your customer.
Ability to Qualify Reliant on Customer Credit Score
If your customers have poor credit history, a factoring company may not want to take on the risk of relying on them for payment and your application might be denied.
The Invoice Factoring Stigma
If you’re considering selling receivables, it’s crucial to understand that there’s a difference between selling accounts receivable to a bank vs. an independent company. Because independent factors are unregulated and have a stigma of being predatory, this has affected the perception of the financing option as a whole.
Remember that financial institutions are far more regulated than independent companies and have to abide by certain rules and restrictions. This is why most choose to factor with a bank.
Through the sale of accounts receivable, businesses unlock immediate funds that otherwise wouldn’t be available. These funds, provided by a factoring company, can fund expansion efforts, be used to make payroll, make rent, increase inventory, and more.
Accounts receivable factoring is an especially useful alternative for small businesses, new businesses, or seasonal businesses who can’t qualify for a standard business loan. In some cases, selling receivables could even make sense for businesses that can qualify for those traditional loans.
If you have any questions about selling receivables or think your business might be a good fit for factoring, feel free to reach out to altLINE at +1 (205) 607-0811 to discuss with one of our representatives or fill out our free factoring quote form.
The sale of receivables in return for a cash advance is an alternative financing solution called invoice factoring.
Receivables are sold to invoice factoring companies. These companies buy accounts receivable to help business owners improve cash flow, particularly small business owners who might not be able to qualify for a traditional business loan.
Many small business owners sell receivables to third-party invoice factoring companies because an immediate cash advance is provided of up to 80-90% of the value of each individual outstanding invoice. This cash advance can greatly assist businesses maintain healthy cash flow and fund expansion efforts without having to worry about long payment terms or slow-paying customers causing financial distress.
As it relates to selling receivables, recourse refers to the type of debt; more specifically, which party between the borrower and the lender (factoring company) is liable for lost funds in the case a debtor fails to submit invoice payment. Under a recourse agreement with a factoring company, the borrower is liable. Under a non-recourse agreement, the factoring company is liable.
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Invoice factoring can help business owners fill the gap between when an invoice is created and when the customer actually pays. Obtaining cash to invest back into your company sooner rather than later is one of the main advantages of factoring, though you’ll want to be aware of potential disadvantages of factoring as well, such as extraneous fees and sneaky policies that some factoring companies might induce before sealing the deal.
In this guide, we’ll break down all of the advantages and disadvantages of factoring, so you feel confident you’re making the right decision when deciding whether or not to factor your invoices.
Invoice factoring is the process of selling unpaid client invoices to a factoring company in exchange for an immediate cash advance.
Factoring can be condensed into a few simple steps:
1. A business reaches a deal with a third-party factoring company (known as a “factor”) via a factoring agreement to sell existing and future outstanding accounts receivable to the factor.
2. Once the business invoices their customer, the business sends a copy of the invoice to their factoring company and is immediately advanced 80-90% of the value of the invoice.
3. When ready and able, the customer submits invoice payment to the factoring company (not their supplier).
4. Once payment is received and processed, the factor releases the remaining value of the invoice to the business, minus a small factoring fee.
Most companies factor receivables because a client takes too long to pay, disrupting cash flow. However, some businesses with reliable customers still choose to factor their receivables to increase working capital without sacrificing much in the long-term.
Whether you’re a new small business owner or you manage an established company, factoring invoices can be a major asset for your B2B strategy. It offers benefits that other traditional lending options can’t provide, plus it is a more accessible solution for many businesses.
Below are some of the biggest advantages of factoring for B2B businesses.
Perhaps the most obvious reason why people turn to invoice factoring: it provides fast cash to keep processes running smoothly.
With invoice factoring, you receive a cash advance, while other alternative financing options such as invoice discounting provides a loan that you must repay.
There are legitimate reasons why a business owner would need to get access to the fast cash, such as:
In general, keeping cash on hand means you can say “yes” to a new opportunity, instead of passing it up because you’re waiting for funds to come through.
Getting a loan can prove out-of-reach for businesses with limited collateral and a short financial history. However, invoice factoring companies pay the most attention to the credit scores of your customers. That means a faulty or nonexistent track record won’t matter as much when you apply.
According to altLINE Vice President of Operations Kelley Burnett, this is one of the most common reasons small business owners choose invoice factoring.
“Factoring offers an unprecedented opportunity to start or grow an existing business by focusing more on the creditworthiness of a client’s customer base,” Burnett said. “A factor knows that invoices purchased from strong, creditworthy customers will be paid back. A factoring facility relies on the strength of a client’s accounts to enable growth. This way, the only thing standing in the way of growing your business, is your ability to solicit and service new, creditworthy customers.”
The fact that almost any business – regardless of credit score or credit history – can get approved is one of the main benefits of factoring and highlights why it’s such a popular financing method for new business owners and small business owners.
Increased cash flow for your company means you can allow customers more leeway when it comes to working out payment terms. Instead of requiring immediate payment, you can give clients a month or more to complete the invoice, without worrying about the strain it’ll place on your own business. And if you’re already working on extended payment terms, you won’t have to rely on debtor payment habits to dictate your cash flow.
Unlike a traditional loan, which requires collateral, invoice factoring is unsecured. Therefore, you won’t need to worry about valuable assets being seized if the customer fails to pay.
If the customer does fail to pay, a good factoring company will work with you to find a fair and sensible solution. This is where factoring with recourse vs. factoring without recourse comes into play.
Another example of how factoring reduces risk is the fact that a reputable factoring company like altLINE provides complementary credit checks for your existing and potential new customers. Many, including small business owner Krissy Wellman, testify that this is actually the biggest benefit of factoring.
“The thing I like the most is that you credit check our potential clients before we start doing real business with them,” said Wellman, CEO of Wellman’s Staffing. “We absolutely love that you’ve helped us figure which businesses we can do business with and which businesses to avoid partnering with.”
After you initially set up an account with an invoice factoring company, you should be able to receive cash within hours of submitting an invoice. Most factoring companies, including altLINE, allow business owners to manage this entire process online.
Factoring isn’t always the best option for every business, particularly large companies. Be sure to weigh the potential drawbacks before determining what’s best for your business.
Here are some of the potential disadvantages of invoice factoring:
While invoice factoring is, at its core, a business practice like any other, some might find that it has a dark past. Certain lenders have been known to take advantage of clients with confusing language and dodgy practices, though industry standards have since evolved for more transparent transactions.
The factor company basically takes a cut out of each invoice. Even though it can be as low as 1-3%, you’re still losing a bit of income in the long run which may affect your company’s monthly budget.
Though the pressure to have good credit is off your shoulders, a factoring company will need to verify your customers’ creditworthiness before taking the invoice. If the rating isn’t up to snuff, your invoice factoring request might be denied.
Just because the factoring company buys the invoice doesn’t mean the customer is guaranteed to pay. In some cases, you might be required to settle the bill if the invoice isn’t cleared. However, if you’re using non-recourse factoring, you won’t be responsible for any missed company payments; rather, the factoring company will accept responsibility.
Not all factoring companies are the same, as some might try to take advantage of you. Application fees, processing fees, a credit check, and late payment fees can add up quickly. Even if you’re OK with the quoted factoring rate, be wary of additional costs and be sure to conduct thorough research before signing on. Make sure to read the fine print and ask questions up front.
The main difference between invoice financing and invoice factoring is how your invoices are treated. With invoice financing, you put them up as collateral for a loan. Meanwhile, in factoring, you sell invoices to the factoring company for a cash advance.
Factoring is generally quicker and easier to qualify for because the company will review your clients’ financial profiles instead of yours. However, invoice financing generally has lower fees than factoring.
While they are both viable financing methods for your company, business loans and invoice factoring have their own uses.
Business loans can take weeks to provide funding, meaning they are better for buying capital goods like equipment and office space. Meanwhile, factoring provides cash advances within 1 or 2 days, which makes it good for solving cash flow issues when clients are slow to pay.
The main advantages of factoring will be most applicable for small, B2B businesses for a few reasons. Firstly — because cash flow can get particularly tight for new companies attempting to grow — the cash flow boost provided by a factoring company can be extremely useful. Plus, smaller businesses can have a hard time qualifying for traditional bank loans. Factoring is a very accessible alternative financing option with much easier approval than those bank loans.
With that being said, here’s a recap of the advantages and disadvantages of factoring:
| Advantages of Factoring | Disadvantages of Factoring |
| Reliable access to quick cash | Potential for slightly reduced profit margins (typically 1-5% factoring fee) |
| Easier approval than most traditional bank loans, including for businesses with low credit or lack of credit history | Stigma surrounding invoice factoring or related alternative financing methods |
| Added flexibility for client payment terms | Low customer credit score could make your business ineligible to qualify |
| Limited risk for your business compared to most traditional financing methods | Collection isn’t guaranteed (when using non-recourse factoring) |
| Highly accessible – most factoring companies allow business owners to manage entire process online | Certain factoring providers can add hidden costs and fees, requiring need for due diligence related to finding a truthful provider |
Like any business practice, invoice factoring comes with pros and cons. Carefully consider the why behind your choice. Will it help your company grow and expand? Are you planning on investing the money back into your merchandise or employees?
If your answer is yes, the advantages of factoring likely outweigh the disadvantages. If you’re interested in learning how factoring can benefit your business, request your free factoring quote from altLINE.
Below are some of the most commonly asked questions about factoring your accounts receivable.
Invoice factoring has several advantages, but the main advantage of factoring is the immediate cash flow boost it provides a business. Unlike many financing options, factoring does not require the borrowing business to tie collateral to the funds. For many business owners, this is the most enticing aspect of invoice factoring.
Generally, a factoring company will charge 1-5% (this is considered the “factoring fee”) of the total invoice value, depending on variables such as your factoring volume, invoice size, risk profile, and client credit. If your company factors many invoices and works with trustworthy clients, your fees will generally be lower.
At altLINE, we encourage small to medium-sized businesses to look into invoice factoring, as typically these are the businesses that would benefit most from quick cash flow boosts. It’s important to explore and weigh your options, so if you’re a business owner with questions about the factoring process, feel free to give altLINE a call at +1 (205) 607-0811.
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