B2B companies are often left carrying large volumes of outstanding invoices from their customers as payment terms can extend up to 30-days, 60-days or even 90-days. This kind of bottleneck can have a significant impact by severely restricting the operational capacity of the business. Invoice Factoring allows a business to sell their unpaid invoices to a third party acting as a factor. There are fees associated with this service as the factoring company is taking over and buying the debt.
How Does Invoice Factoring Work?
Invoice factoring works differently from traditional financing options such as business loans because it does not operate under a traditional loan structure. The factoring company is not lending money to the business, they are purchasing the invoice as an outright asset sale.
The factor will advance the company an agreed percentage of the outstanding invoices, usually up to around 80%. They then take over the responsibility of arranging payment for the invoices from the end clients. Once the client settles their invoice, the remainder of the funds are then sent to the business, minus a fee for the services of the factoring company.
Which is Better: Invoice Factoring or a Business Line of Credit?
Factors typically charge a fee of between 1% and 5% of the total value of the invoices sold to them. Depending on how robust the profit margins are for a business, sacrificing 1% to 5% of top-line monthly revenue could have quite an impact on the bottom line. Over time, repeated instances of invoice factoring can lead to unpredictable, lumpy cash flow that can make it harder to manage day-to-day operations.
Another key issue to consider is that of client relationship management. Because invoice factors will take over the invoice completely, they also now have a direct relationship with your customers as they arrange for repayment. Depending on which company you choose for factoring, this could lead to issues based on how they handle this process. It also reveals to your customers that you have used invoice factoring and in some industries this could be seen as a sign of poor cash flow management.
One of the many benefits of an Accounts Receivable (AR) Line of Credit (LOC) is that it is a private arrangement between your business and the lender. You are still responsible for maintaining prompt payment from your customers, allowing you to take the lead on customer service standards and any early payment discounts that might encourage loyalty.
AR LOCs are a form of lending but the interest payable is not fixed and it relies on how much of the available credit that you use. This means if you repay the funds fast enough your interest due will remain low. In contrast, with invoice factoring, the amount of interest you pay is not in your control as it depends entirely on how long your clients take to pay.
The decision between a business line of credit or invoice factoring depends mostly on your own business practices and preferences, but there are several reasons why an AR LOC would be best for most businesses. With a business line of credit you prioritize control and cost predictability, while still maintaining a direct relationship with your customers. An LOC is an agile and revolving credit facility, preferred by businesses that want to access liquidity while still protecting their brand reputation.
How InterNex keeps it private
InterNex lines are non-notified. Your customers pay into an account established in your company’s name, they are never asked to confirm invoices, and nothing changes in how they pay you.