How Factoring Simplifies Invoice Collection and Management

Did you know that 65 percent of businesses spend 14 hours per week on average just managing invoices, according to Intuit surveys? Spending this much time on administrative tasks diverts resources from core areas of your business, which can stunt growth and diminish efficiency. Invoice factoring offers a streamlined approach that simplifies invoice collection and accelerates cash flow. Give us a few minutes, and we’ll explore how the process works.

Factoring Simplifies Invoice Collection

Invoice factoring is a business funding solution, often leveraged in place of traditional options such as loans and lines of credit. However, it works in a unique way that helps streamline your invoicing and collections processes.

How Factoring Works

With factoring, you aren’t getting a loan that you have to pay back with fees and interest. You’re selling your B2B invoices to the factoring company, also called a factor, at a slight discount and receiving most of the invoice’s value upfront. That way, there’s nothing for you to pay back, and your business is always moving forward.

Therefore, your factoring company works more like a partner in your receivables processes, similar to how an outsourced billing company works, while providing you with the working capital your business needs right away.

The Factoring Process

• Step 1: Serve your clients. Keep serving your clients the way you always have. 
• Step 2. Send invoices. Under most factoring agreements, you’ll send your clients their invoices and then send a copy to the factoring company. However, some factoring companies will take care of invoice preparation for you upon request.
• Step 3: Receive instant payment. Your factoring company will verify the invoice is valid and send you up to 95 percent of the invoice’s value right away.
• Step 4: Let your factoring company collect. Your clients are given the factoring company’s information for billing purposes, and many offer digital payment options to streamline the process further, so follow-ups generally aren’t needed. However, your factor will follow up with friendly reminders if the due date is missed.
• Step 5: Receive the remaining payment. You receive the remaining payment minus a small factoring fee when your client pays.

Factoring Offers Many Invoice Collection and Management Benefits

Your factoring company takes care of the heavy lifting in your invoice collection and management processes, providing your business with a multitude of benefits.

Immediate Payment on Invoices

Cash flow is the lifeblood of businesses. However, B2B invoices aren’t typically paid for a full 38 days after invoicing, Atradius reports. The length of time it takes to get paid is on the rise.

These slow payments impact business cash flow in profound ways. For instance, many businesses report difficulties keeping up with payroll and paying existing debts. Also, many owners say they’ve had to turn down work because they don’t have cash to cover the associated expenses.

Invoice factoring provides immediate payment on invoices and accelerates cash flow, making your business less likely to experience these types of challenges.

Decreased Administrative Time

If your business spends 14 hours each week on invoice-related tasks like most, you’re losing more than 90 work days per year to them. That’s time you could be spending directly with your clients and applying to business growth. Because factoring takes care of most of these processes for you, you get all that time back.

Reduced Risk of Late and Slow Payments

More than half of all B2B invoices are paid late, Atradius reports. As a business engaged in factoring, you may not be concerned by this statistic. After all, you receive your cash right away. However, slow payments can still have some impact on your business and operations. For instance, factoring fees are lower when your clients pay faster. The likelihood of receiving payment also reduces as the invoice ages.

Your factoring company helps address this by performing client credit checks before you factor invoices. They’ll provide you with insights about the creditworthiness of each client so you can make informed decisions about who you extend credit to and how much. This makes it easier to ensure your clients pay in a timely manner to reduce your overall risk and costs.

Reduced Risk of Non-Payment

Nearly one in ten of B2B invoices is written off as bad debt in Canada, per Atradius. Given economic conditions, it’s probably no surprise that this figure is on the rise. That’s money you’ve already earned stripped from your business, along with any cash outlays you’ve made to complete the work.

The credit checks run by your factoring company help safeguard your business from bad debt. This is enough for most businesses. However, those in high-risk industries or with additional concerns can explore non-recourse factoring.

Recourse vs. Non-Recourse Factoring

In a traditional factoring arrangement, your business is ultimately responsible for ensuring your factoring company receives payment. That means if your client doesn’t pay, you’ll usually have to submit another invoice of equal value, though each factoring company has its own process. The concept is often referred to as “recourse factoring.”

Some factoring companies offer non-recourse factoring as an alternative. This shifts the risk of non-payment to your factor. If a client doesn’t pay, they absorb the loss, not you.

While recourse factoring is the more popular option because it keeps costs lower, is more readily available, and risk is already reduced through credit checks, non-recourse factoring can completely eliminate the risk for those with additional concerns.

Happier Clients

More than half of all businesses are asked for extended payment terms, per Lockstep. Even when a business wants to deliver on this common client request, it’s not always possible due to cash flow constraints.

Factoring allows you to provide your clients with terms that work for both of you so your clients stay happier and your needs are met. With the cash you receive from factoring, you can also accept larger orders or more frequent orders. Many businesses use these points to their advantage when bidding on new contracts or negotiating deals.

Simplify Your Invoice Collection and Management with Factoring

If you’d like to accelerate your cash flow and simplify collections and invoice management through factoring, we can help match you with a factor that understands your needs and offers competitive rates. To learn more or get started, request a complimentary factoring quote.