Did you know that there are almost 28 million small business in the United States? Small business are often referred to as “the backbone” of American society. Yet it can be difficult for them to survive in an increasingly competitive climate, and the high rate of bankruptcies among small businesses are proof of that fact. Many small business owners find maintaining financial stability difficult. This is particularly true for small businesses that rely on invoicing. When payment is received through invoices rather than upfront payment, there is of course a delay on receiving funding, and small businesses may have to cover the payment for goods well before they are compensated by those that want the goods.
Of course, it may be inevitable that small businesses are required to send out invoices, depending on what they are selling or marketing. With that being said, receiving a payment upfront may be what keeps a small business from going under entirely. Sometimes, financial success, especially in the earl days of a business’s growth, is less about the amount of payment received and more about when the payment is received. This is where invoice factoring services come into play. Much is unknown about business factoring services, and many small business owners remain confused about what they really involve. With that being said, we’re demystifying what business factoring services involve, and why factoring financing can help small businesses stay afloat.
1. Business Factoring Services Offer Upfront Payment
The main appeal of small business invoice factoring is that factoring companies offer upfront payment for invoices that small businesses would otherwise be waiting weeks to have paid. Essentially, these companies convert outstanding invoices due within 90 days to immediate funding for small businesses. Although 90 days may seem like a small window of time, it can still create a sizable gap in payment for struggling small businesses. Essentially, business factoring services create a bridge over that gap. With that being said, they do not simply offer payment for the entire invoice upfront.
2. Upfront Payments Do Not Cover The Entire Invoiced Amount
Part of the confusion surrounding business factoring services may have to do with the perception that they cover an entire invoice. Understandably, this doesn’t make sense to a lot of small business owners. In fact, business factoring services usually front between 70 to 90% of the invoice amount. However, they do not withhold the remainder. Rather, they give the balance to the small business owner once the invoice is paid. This is why business factoring services run credit checks on those that have been invoiced — to ensure that they can and ill pay. The business factoring companies collect fees for their services, which is how they are able to “keep the lights on”, as it is. Understanding how a business factoring service runs is a key step in deciding whether or not it’s right for your small business.
3. Business Factoring Services Take Responsibility For Invoicing
If you’re a small business owner considering a business factoring service, keep in mind that these companies usually “take over” the invoices that they front the payment for. This means that they will be responsible for following up on unpaid invoices, and communicating with clients. Some small business owners prefer to be in control of all aspects of their business, making this a daunting prospect. For others, letting go of the reins frees up time and essentially allows small business owners to focus on other aspects of their companies. For that matter, business factoring services may better manage invoicing, as this is what they focus on.
Business factoring services are not the right for every small business. But for businesses that send a large number of invoices, they could offer the crucial relief necessary to keep funding flowing.