80% of $100,000 = $80,000 Over the next few weeks, the invoice factoring company collects payments on the invoices you sold to them. You now have $80,000 you can use to supplement cash flow and regular business operations. Within 24 hours, the factoring company provides you with 80% of the invoice amount. You decide to sell the $100,000 invoice to a factoring company, and agree to pay a flat factoring fee (sometimes called factoring rate) of 5%. But when you know your customers are reliable and pay invoices in a timely manner, invoice factoring may be an option to consider. You could turn to an online business loan or a credit card to try and get cash quickly. However if you wait 60 days for repayment, your business could be left with a cash flow shortage, threatening the wellbeing of your operation. Perhaps you sell $100,000 worth of t-shirts and invoice your customers with a due date in 60 days. To give you a better understanding of how invoice factoring services work, here’s a hypothetical example: Let’s say you own a clothing store that frequently sells large quantities of t-shirts to other organizations. While you may anticipate seasonality, sometimes unexpected events occur that leave you with few options to fund payroll and other working capital, in which case invoice factoring may help. B2B businesses often use factoring as a way to supplement cash flow during seasonal slow-downs, economic instability, or when business costs suddenly change. ![]() When your customers pay, the factoring company collects payment on the invoices under specific terms they set. Once the factoring company receives full payment from your customers, they provide you with the remaining amount of the invoice, minus a factoring fee. Other types of businesses such as staffing agencies, may command advance rates from 80% to 90%, and transportation often sees the highest. Some industries, such as the medical industry, may be seen as riskier, and thus offer lower advance rates from 60% to 80%. Advance rates are typically based on how risky the invoice factoring is for the factoring company. Factoring companies will pay you a percentage of the invoice amount upfront, which reflects the advance rate. Because you are selling your invoices, invoice factoring is technically not a business loan. How Does Invoice Factoring Work? Invoice factoring occurs when you sell your unpaid invoices to a factoring company, or factoring receivables company, who then takes ownership of the invoices. While small business invoice factoring may not be useful for big, long-term expenses, understanding what they are and how they work could come in handy in the future. If you have customers and vendors who pay invoices frequently, small business factoring is one way to leverage unpaid invoices without applying for an actual loan. There are options like business lines of credit or short-term business loans, but you may also consider invoice factoring as a way to access cash quickly to meet immediate needs. It can be frustrating and worrisome when income you expected is unavailable, leaving your business short on cash flow for necessary expenses. If you’re a small B2B business that frequently issues invoices to customers and vendors, you’ve probably encountered times when an invoice is late or goes unpaid. These helpful resources support your employees, offer funding to make equipment purchases, and assist small businesses in recovering from the economic impact of the COVID-19 pandemic. Thankfully, there is assistance available through the Small Business Administration's (SBA) coronavirus relief options, which include SBA Express Bridge Loans and SBA Debt Relief. ![]() Not to mention, you want to ensure that you and your staff are safe and healthy. Managing cash flow, payroll, and other expenses becomes difficult when business slows dramatically. With COVID-19 and quarantine, it’s a challenging time to manage a small business.
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