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What Is Invoice Factoring For Small Business?

There are a lot of small to medium sized business owners that want to know what is invoice factoring and how it can benefit their business. As there is a lot of misinformation about this opportunity for a company, it is well worth considering the facts.

When considering the question what is invoice factoring, it is essential to understand that this funding option is not a loan. There is no interest or principal repayment, and it will not show up as a negative against your business if you do need to complete a credit check or are in the process of another type of financial transaction.

Who Does Factoring?

Factoring is not completed by traditional types of lenders such as banks and small business financing companies. Instead, it is done by specialized companies known as factors.

These businesses specialize in buying accounts receivables from businesses and then managing the collection for the invoice from the customer. They also advance up to 80% of the total of the invoice to your company in just days from the application.

How it Works

The application for factoring is very simple. When you consider the question what is invoice factoring, think about a very simple process. As this is not a loan, there is no need to complete a credit check on your business.

Instead, the factor focuses on the creditworthiness of your customers. When they purchase your accounts receivable, they will automatically take over those invoices, freeing up your office staff to focus on new accounts and their job.

When your customer’s pay the factor, they subtract their fees from the 20% withheld and forward the residual amount to your account. This allows you to budget for the fees involved in the service, which should all be disclosed in the agreement and transparent.

It is important to compare factors, as you would any other type of financial service. Top factors often become partners in a business and can provide assistance with a wide range of different financial goals for the company.