No matter the size of your business, working capital can play a critical role in enabling efficient cash flow and sustaining growth — and one common type of working capital financing is factoring.
Whether you are looking to fill gaps in cash flow, better manage unexpected expenses, or explore growth opportunities, factoring solutions can give you the extra cushion you need to help your business reach its full potential.
At Midwest Business Funding, we provide tailored factoring services designed to address each company’s unique financial needs. Contact us today at +13176063595 or fill out our web form to learn more.
What Is Invoice Factoring and How Do Business Factoring Services Work?
Invoice factoring is a type of alternative working capital financing in which companies sell their outstanding invoices to a third party (factor) in exchange for upfront cash. Unlike other types of working capital loans or traditional business loans, invoice factoring does not impact your credit because it is processed as a sale, not a loan.
This process is also referred to as accounts receivable financing as you are selling the outstanding invoices that make up your accounts receivable — the money your customers owe you that has not yet been paid.
How business factoring services work:
- First, you submit your outstanding invoices to the factoring company.
- The factoring company then verifies the invoices.
- Once the invoices are verified, the factoring company advances a percentage of the invoice value back to you.
- The factoring company will then collect payments directly from your customers per the invoice terms.
- After the customers pay the invoices, the factoring company will deduct any agreed-upon fees and send the remaining balance back to you.
While the percentage value of the invoices that are advanced to you can vary from one factoring company to the next, the average is typically between 70-90%. Here is an example of what this might look like:
| Invoice value: | $10,000 |
| Initial advance (80%): | $8,000 |
| Factoring fee (3% of invoice value): | $300 |
| Remaining advance after customers pay their invoices (minus fee): | $1,700 ($2,000 – $300) |
| Total received: | $9,700 |
The Benefits of Invoice Factoring for Businesses
Small and large businesses alike can see numerous benefits from using business factoring solutions, including:
Increased Cash Flow
When you work with a trusted factoring partner, you get quick access to cash that might otherwise be tied up in unpaid invoices. This immediate access to funds can help you cover daily operating expenses, payroll, unexpected costs, growth investments, and more.
Improved Working Capital
Working capital is the measure of your company’s financial health, as it’s the difference between your current assets (cash, inventory, accounts receivable) and your current liabilities (accounts payable, taxes, wages owed). The difference between these two is what is leftover for your business to use as needed. When working capital is tight, factoring is a quick and easy way to gain access to more cash so your business can operate more efficiently.
Reduced Debt Risk
With traditional business loans, if you can’t pay back the loan, you can easily fall into debt. However, as factoring is not a loan, it doesn’t impact your credit and reduces debt risk. This is because the factoring company assumes the risk if customers don’t end up paying their invoices.
Greater Financial Flexibility
Having the flexibility to seize opportunities that can help your business thrive and grow is critical to success. With factoring, you gain quick access to cash that enables you to focus on core operations without the financial stress while also giving you a cushion to go after business opportunities, such as investing in emerging technologies, trends, and new projects.
Growth Acceleration
Sustainable growth is an important element in building a successful business. Factoring can help by providing you with the necessary funds to grow your business, such as hiring more staff, expanding your operations, offering new products and services, entering new markets, and launching new marketing campaigns.
Custom Factoring Financing: How Factoring Can Fit Your Business Needs
As factoring services have grown in popularity, innovations have emerged enabling factoring companies to provide more customized factoring solutions to meet the unique needs of every business. Today, businesses can look into tailored funding options and specialized programs to align their specific financial needs with services provided by factoring companies.
When choosing a factoring program, follow these steps to ensure the available services and capabilities meet your business needs:
- Assess financial gaps and cash flow needs, such as managing payroll, covering daily operational expenses, or investing in new equipment.
- Take the time to research factoring companies to find one that can address the unique needs of your industry and the size of your business. It’s also important to look for a company that provides stellar customer service and offers competitive rates.
- Before starting any factoring program, make sure your finance teams thoroughly understand how factoring works and how it will play a role in your overall financial strategy.
- Implement a streamlined and efficient accounts receivable process to get the most out of the factoring program and reduce any delays with advance funding.
- To optimize the benefits of factoring over time, regularly monitor performance for features like customer payment trends, receivables turnover, and cash flow.
Is Invoice Factoring Right for Your Business?
While factoring services are a powerful tool that can help your company gain more financial freedom and flexibility, it’s always best to thoroughly evaluate your financial needs and goals to ensure factoring is the right choice.
Consider the following questions, and if the answers are “yes”, then invoice factoring may be the right solution for your business:
- Have you reached your limit on a traditional line of credit?
- Do you have a timely opportunity for a growth investment?
- Do you need cash fast and flexibility with how you use it?
- Are you struggling to get a traditional loan due to insufficient income, poor credit, or few assets to borrow against?
- Are you comfortable outsourcing collections and customer interactions?
- Are your customers creditworthy with consistent payment histories?
Tailored Factoring Services: Modern Solutions for Modern Businesses
At Midwest Business Funding, we have innovative financial solutions to meet your modern business needs. As industry leaders, not only do we bring unparalleled expertise and superior customer service to businesses across industries, but we’re also dedicated to providing custom factoring solutions, tailor-made to address the unique needs of each and every business.
Let’s work together to find a solution that works for you! Contact us today at +13176063595 or visit our website and fill out our web form to learn more about our comprehensive factoring services.
