As a small business owner, cash flow can be one of the biggest challenges you face. You may have plenty of outstanding invoices, but if your customers take too long to pay, you may find yourself short on cash to cover your expenses. Invoice or accounts receivable (AR) factoring can be a helpful solution in these situations, allowing you to turn your unpaid invoices into immediate cash.

So, what is invoice/AR factoring? Essentially, it involves selling your outstanding invoices to a third-party funding company (the factor) at a discount. The factor then advances you a percentage of the invoice amount (usually 70-90%) upfront and collects payment from your customers when the invoice is due. Once (the factor) receives payment, they deduct their fee (typically 1-5% of the invoice amount) and pay you the remaining balance.

Invoice/AR factoring can be a good option for businesses that need quick access to cash, but may not qualify for traditional bank financing. Unlike traditional loans, factoring is based on your customer's creditworthiness rather than your own, so you can still qualify even if you have poor credit or limited operating history. Additionally, factoring is not a loan, so there's no debt to repay or interest to accrue.

There are some potential downsides to consider as well. Factoring fees can be higher than other types of financing, so it's important to weigh the cost against the benefits. Additionally, working with a factor means giving up some control over your customer relationships, as the factor will be responsible for collecting payment and may need to communicate directly with your customers.

If you're considering invoice/AR factoring, there are a few key steps to take:

1. Research potential factoring companies to find one that offers favorable terms and fits your business's needs.

2. Provide the factor with information about your outstanding invoices and customers, including aging reports and credit histories.

3. Review and sign a factoring agreement that outlines the terms of the arrangement, including fees and the advance rate.

4. Once approved, submit invoices to the factor for funding.
‍

Overall, invoice/AR factoring can be a helpful tool for small businesses struggling with cash flow. However, it's important to carefully consider the costs and benefits before committing to the arrangement and to work with a reputable and experienced factor to ensure a smooth and successful process.

Sencha can help your small business with any invoice/AR factoring needs through our AI-based engine. If you’re considering another type of financing, let us help you weigh your options.

‍