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Cash flow management is a common issue among many businesses, and unfortunately, not being able to manage your cash flow effectively can be detrimental for your company’s long-term health and growth.
Even if you are seeing a positive development across many financial metrics, there are multiple reasons why you may need help generating enough cash – from struggling to collect payments from several huge creditors to allowing many creditors too much credit.
This is where invoice factoring comes into play – it can be a great way to tap into your company’s potential revenue without waiting, allowing you to access cash quickly even if your invoices haven’t been paid yet.
But what exactly is invoice factoring, and what are some of the most common myths surrounding it? We will uncover everything in this article – let’s take a look at some of the biggest invoice factoring myths:
What Is Invoice Factoring?
Before we get into the invoice factoring myths, it’s important to understand what invoice factoring exactly is.
This type of financing allows you to sell your outstanding invoices or accounts receivable to a third-party company called a factor or factoring company.
You will receive immediate cash from the factor, typically a percentage of the invoice value, instead of waiting for the invoice to be paid by your customers. The factor, on another hand, takes over the responsibility of collecting the payments.
How Is Invoice Factoring Different From a Loan?
Invoice factoring is different from a traditional business loan in several ways:
- Structure & Process – Invoice factoring involves selling your accounts receivable in exchange for immediate cash, while a business loan lets you borrow a fixed amount of money from a lender, and agreeing to repay it over time with interest.
- Ownership & Liability – When you factor an invoice, you are essentially selling your right to collect payment on that invoice to the factoring company – this doesn’t add debt to your balance sheet. However, a business loan adds a liability to your balance sheet because you are borrowing money that must be repaid.
- Qualification Criteria – To get approved for invoice factoring, you will be assessed primarily on the creditworthiness of your clients, not your business. Factoring companies are more concerned with whether your clients will pay their invoices. Traditional loans, however, require a thorough evaluation of your business.
- Cash Flow & Speed – Invoice factoring provides immediate access to cash, usually within 24 to 48 hours after submitting an invoice. Business loans tend to be more time-consuming unless you are applying with NBC – we can get you approved and funded in as little as 24 hours as well!
- Flexibility & Use – Factoring is highly flexible, allowing you to choose to factor only specific invoices or clients depending on your cash flow needs. However, traditional business loans are less flexible – once you secure the loan, you are committed to a strict repayment schedule.
7 Busted Invoice Factoring Myths
So, why are there so many misunderstandings when it comes to this type of financing? Let’s take a look – and bust – some of the most common invoice factoring myths:
1. Invoice Factoring Companies Take Control of Your Clients
This myth does have some truth to it. Dealing with factoring companies that constantly hound your clients for payments and information can be a terrible experience for both you and your customers.
However, there are very few financing companies, including National Business Capital, that remove the contact between your clients and factoring companies, letting you regain control over your customers, and eliminating the frustration.
2. Clients Will Think Less of You for Using Invoice Factoring
No, they most likely won’t. In fact, the vast majority of clients have gotten so used to business owners using PO financing to cover invoices that it has become largely standard among most wholesale, distribution, transportation, manufacturing, and retail businesses.
In addition, clients typically focus on the quality of products or services provided and the reliability of your business rather than the specific financial arrangements you use – so, definitely don’t believe this one of the most common invoice factoring myths!
3. It Takes Weeks to Months to Fund Through Factoring
Next on our list of invoice factoring myths is that it takes weeks to months to fund through factoring – but that’s not the case if you find the right financing company.
Yes, most factoring companies take anywhere from weeks to months before you see any capital coming your way. However, through National’s expedited and streamlined process, you can turn your invoices into cash on-hand between 1-4 days after applying.
4. Factoring Lacks Payback Transparency
Another one of the common invoice factoring myths is that factoring lacks payback transparency.
But that’s not necessarily the case – there are now invoice factoring lenders that provide full transparency prior to you signing up, letting you pay off your borrowed factoring capital as you would a small business loan!
One of them is Specialty Finance Group National Business Capital – you can check our business loan options here.
5. Factoring Doesn’t Cover Enough of Your Invoices
It’s true that most invoice factoring companies only cover a small portion of a company’s invoices, which can wind up hurting more than helping in the long run.
The truth is that invoice factoring products can cover up to 90% of all invoices—no matter what your factoring company may tell you. National is one of the few financing companies that offer this level of coverage, so you can cross this off from the list of invoice factoring myths.
6. The Rates Are Way Too High
Among the most common invoice factoring myths is that the interest rates are way too high – but they don’t have to be, despite what you may have been told by past financing companies.
With full transparency, National offers invoice factoring with lower rates and longer terms than the vast majority of traditional factoring companies.
7. Invoice Factoring Approval Qualifications Are Too Tough to Meet
Through traditional factoring companies, yes, approval can be so difficult that you’ll start to wonder how any business can get factoring funds at all.
The answer is that they get it through financing companies like National Business Capital. Invoice factoring is one of, if not the easiest, options to get approved for – so don’t hesitate to apply with us!
How to Get Invoice Factoring with National Business Capital
Simply call (877) 482-3008 to speak with a member of our team, or fill out our simple 1-minute application online to get the ball rolling, and receive a secured or unsecured business loan of your choice in as little as 24 hours!
We are excited to learn about your business financing needs and goals, help you understand the details of our unsecured loan products (we offer several), and answer all of your questions clearly, honestly, and without any confusing jargon.
Frequently Asked Questions
Invoice factoring offers several benefits, including improved cash flow by providing immediate funds based on outstanding invoices, enabling businesses to cover expenses without waiting for client payments.
It also reduces the burden of debt collection, as the factoring company assumes this responsibility, and it can be easier to qualify for than traditional loans, making it a flexible financial solution for businesses.
Industries that commonly use invoice factoring include manufacturing, transportation, staffing, and construction, where businesses often face long payment cycles. Additionally, service-based industries like consulting, IT, and healthcare frequently use factoring to manage cash flow due to delayed payments from clients or insurance companies.
It’s especially popular in industries with large accounts receivable and tight cash flow needs.
Through invoice factoring, businesses typically receive 70% to 90% of the invoice value upfront, depending on the industry, client creditworthiness, and the factoring company’s policies.
The remaining balance, minus the factoring fee, is paid once the invoice is fully settled by the client. This immediate advance helps businesses maintain cash flow while waiting for customers to pay their invoices.
If your client doesn’t pay the invoice, the outcome depends on the type of factoring agreement. In recourse factoring, you are responsible for repaying the advance to the factoring company.
In non-recourse factoring, the factoring company absorbs the loss, but this usually comes with higher fees. The factoring company may also pursue collections from your client directly in either scenario.
Yes, most factoring companies allow you to choose which invoices to factor, a practice known as selective or spot factoring. This flexibility lets you manage cash flow according to your needs by factoring only specific invoices rather than all your receivables.
However, some factoring agreements may require factoring all invoices from certain clients or within certain terms, so it’s important to review the contract carefully.
ABOUT THE AUTHOR
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
