Is Invoice Factoring a Good Idea?

If you work in an industry like trucking, manufacturing, or construction, you have probably heard a few things about invoice factoring over the years.

Some of what you’ve heard might not have been too positive.

Factoring does not have the most sterling reputation in some industries because it’s an unregulated form of financing that does include some unreliable providers. However, there are also many excellent factoring companies that have helped hundreds of thousands of businesses thrive—and often survive—through the quick funding of receivables that factoring provides.

Is invoice factoring a good idea for your company, though? That may depend on your company’s financial condition, customers, and goals. Below is a short list of some common traits among businesses that have chosen factoring, and succeeded with it.

Lengthy Payment Terms

Because cash flow is king, the amount of time from when you complete a service and when you get paid is critical to your company’s survival. In industries like trucking, manufacturing and distribution, the pay terms can be as long as 60 to 90 days. Many companies do not have the cash on hand to wait months on payment, so fast funding from factoring is an attractive solution.

Not Much Time

Securing a bank loan or a traditional line of credit can take a few weeks, loads of paperwork, and a lot of back-and-forth between you and the lender. Entering into a factoring agreement usually takes less than five business days. The ease and speed in getting set up for factoring is a big draw for companies that need to start building cash flow now.

Lots of Overhead

Invoice factoring can be a game-changer for companies that operate on thin margins with heavy costs like payroll, equipment, and fuel. The ability to get paid on invoices within a day or two helps companies meet those expenses while continuing to serve customer needs.

Poor Credit, Good Customers

Unlike with other forms of financing, a poor credit score does not disqualify you from funding with a factoring provider. If your company has a less-than-great credit score—or you haven’t been in business long enough to build up strong credit—you can still factor invoices.

The key is the creditworthiness of your customers. If a factor determines that your clients have good credit and payment histories, you should be able to secure funding on your receivables. This can also benefit your company’s own credit score because you are not assuming any debt with a factoring agreement.

Limited Resources

Many factoring companies do a lot more than just fund invoices. They manage their clients’ billing process, collect on receivables, and may offer other perks like free credit data, fuel card programs and more. Access to back-office support and other tools can be essential for new or small businesses that have a limited number of employees and resources.

Explosive Growth

It’s a common myth that only struggling companies need to factor their invoices. Many companies have used factoring to grow at a faster pace. Unlike credit lines and other forms of financing, factoring is scalable, which means the funding is designed to match a growing volume of invoices. The speed and flexibility of factoring has helped companies across many industries grow much more rapidly than their competitors, allowing them to gain more market share.

Boom and Bust

Industries like trucking, retail, staffing services and construction having seasonal peaks and valleys. Other businesses, like oilfield services, can have boom periods that last years, and downturns that are equally long. The steady cash flow generated by factoring’s same-day funding of invoices can help companies in many different industries endure periods of low demand, and thrive when business picks back up again.