Why might companies use invoice factoring? What types of companies can best leverage it?
Invoice Factoring enables companies to operate on a cash basis. By converting unpaid invoices into cash, companies bridge the gap between delivering goods or services and receiving payment from customers. Without factoring, companies often wait 30, 60, or even 120 days to receive payment on commercial receivables.
1. Slow Paying Customers
For businesses in industries like trucking, manufacturing, or staffing, operating expenses such as payroll, fuel, and supplies can’t wait for slow-paying customers. Factoring provides the liquidity needed to cover these essential costs without taking on additional debt. As mentioned above, some B2B service providers must wait up to 120 days (four months) to receive payment for work they have already done.
2. High Growth
Companies experiencing rapid growth or pursuing large contracts often face working capital constraints. Factoring gives them the financial flexibility to take on new opportunities, hire more staff, or expand their operations. Companies can sometimes depend on traditional lines of credit, but there comes a point, as contracts increase and the business scales, that a credit line may no longer be sufficient to support growth. Additionally, as mentioned above, if payments are delayed, growth is stalled.
3. Alternative to Traditional Lending
Unlike bank loans or online lending, factoring sometimes doesn’t require as extensive credit checks or collateral. Approval often focuses on the creditworthiness of a company’s customers, making it accessible to businesses that may not qualify for traditional financing.
Why Don’t Companies use Invoice Factoring? The Awareness Gap
At Flexent, we believe there are about 15% of businesses that need something like invoice factoring. It fulfills a unique need that traditional banks and lenders often cannot address, especially for small or medium-sized companies that operate on thin margins. Despite its benefits, however, many businesses are unaware that factoring exists, or their knowledge of factoring is plagued by stigmas and myths.
