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The pros and cons of invoice factoring for small businesses

On Behalf of | Feb 27, 2021 | Small Business

If you have an in-demand idea or service, you may have straightforward path to building a successful small business. Still, with business startups, cashflow can be a problem. If you are struggling to pay creditors or employees, you may be thinking about using invoice factoring.

Invoice factoring is an appealing alternative to a conventional bank loan, as it usually does not require established credit. With this type of financing, you sell your business’s outstanding invoices to a factoring firm. The firm then collects payment from your customers.

Some key advantages to invoice factoring

The biggest advantage to using invoice factoring is an immediate influx of cash. After all, factoring companies usually pay between 70% and 90% of the value of outstanding invoices in just a few days.

Even better, you do not have to worry about trying to collect from customers who may be reluctant to pay. This may save you both time and money.

Furthermore, because you typically offer no additional collateral, you do not have to jeopardize your small business’s equipment, inventory or other assets.

A few considerable drawbacks to invoice factoring

Invoice factoring may not be a good fit for your small business for a few reasons. First, you are likely to take an immediate hit when you sell your outstanding invoices. That is, the factoring company is apt to pay less for your invoices than they are worth.

Additionally, you lose control over the collections process. The tactics the factoring company uses to collect from your customers may make your small business look bad. Even the fact you use invoice factoring may cause your business to seem shaky.

Ultimately, because there may be ways to minimize the negative effects of invoice factoring, this type of financing is certainly worth considering.