Invoice factoring is one of the best forms of funding for small-to-midsize companies (SMEs) and startups, but it’s one of the most underutilized too. As a small business owner, not only is factoring your receivables easier than obtaining a traditional loan, it does not create any debt for your business. Despite the benefits of invoice factoring services, the latest Federal Reserve Bank report shows just four percent of small businesses applied for factoring 2021. This is in contrast to the nearly 90 percent of businesses that applied for traditional loans and lines of credit. Not surprisingly, the same report indicates less than half of those businesses had their financing needs met.
On this page, we’ll explore which businesses and industries make up that four percent, and how invoice factoring helps them meet their needs in ways traditional lending channels can’t.
Invoice factoring Turns Accounts Receivable into Cash
Any business that invoices other businesses for goods or services after they’re delivered can turn their accounts receivable into instant cash by selling their outstanding invoices to an invoice factoring company at lower rates. The process, typically referred to as invoice factoring (but sometimes called accounts receivable financing, accounts receivable factoring, or invoice financing) eliminates lengthy waits for payment. When you sell your unpaid invoices to a third party (the factor), you will receive a percentage of the invoice’s value as immediate cash that you can use as working capital. Accounts receivable factoring companies will typically charge a small fee for their factoring services, which is referred to as the discount rate or factor fee.
Invoice Factoring is a No-Debt Cash Flow Solution
More than 80 percent of failed businesses say cash flow problems contributed to their downfall, according to Entrepreneur. That makes it all the more important to maintain healthy working capital levels, but most business owners take on debt in an effort to stay afloat when experiencing a cash crunch. Instead of getting ahead, they wind up falling further behind, trapped by ongoing cash flow shortfalls and continued payments with interest.
Factoring is one of the few financing options that prevent this vicious cycle. Because it’s like getting a cash advance on your receivables, and your customers or debtors are the ones responsible for paying the factoring company, there’s no debt for you to pay off.
Overcoming Slow Paying Customers with Invoice Factoring
Slow-paying customers can severely disrupt a company’s cash flow, making it difficult to pay employees, purchase supplies, or invest in growth. Invoice factoring provides a practical solution to this common problem by allowing companies to sell their outstanding invoices for immediate cash. This process, known as factoring, is a great way for businesses to avoid the financial strain caused by waiting for clients to pay.
For many companies, traditional bank loans and lines of credit are not viable options due to stringent qualification criteria and long approval times. Factoring is a great way to bypass these hurdles. It provides immediate cash flow without adding debt to the company’s balance sheet, allowing businesses to operate smoothly even when customers delay payments.
Industries that use invoice factoring include those with long billing cycles and high operational costs, such as the trucking, healthcare, and manufacturing sectors. These industries benefit from factoring by maintaining liquidity and avoiding the complications of slow-paying customers. By using invoice factoring, businesses can focus on growth and expansion rather than chasing payments.
Moreover, invoice factoring can provide a level of support that helps companies manage unexpected expenses and maintain a steady supply chain. This makes it an invaluable tool for companies looking to improve their cash flow and ensure business continuity.
It’s Easy to Qualify for Factoring
Not only can factoring help business owners meet financial obligations and grow, but it’s much easier to qualify for factoring than it is to get a loan or business line of credit. There are very few qualifications because, unlike traditional bank options that rely on the business or small business owner having a good credit score, factoring companies look at the creditworthiness of the business paying the invoice—your client, not you.
Get Approved for Invoice Factoring: A Step-by-Step Guide
Getting approved for invoice factoring is a straightforward process that can provide immediate cash flow to businesses struggling with slow-paying customers. Unlike traditional financing options, factoring companies evaluate the creditworthiness of your clients rather than your business, making it easier to get approved even if your business credit is not stellar.
The first step in the process of factoring is to identify a reputable factoring company that suits your business needs. Many factoring companies specialize in different industries, so it’s important to choose one that understands your sector’s specific challenges and requirements. Once you’ve selected a factoring company, you’ll need to provide information about your business and clients, including invoices and accounts receivable details.
Next, the factoring company will assess the creditworthiness of your clients to determine the risk involved. If your clients have a good payment history, you’ll likely get approved quickly. The factoring company will then offer you a cash advance based on the value of your invoices, typically around 70-90%.
After approval, the factoring company takes over the collection of your invoices, and you receive immediate cash flow to manage your operations. This funding solution helps businesses cover expenses, invest in growth, and maintain financial stability without needing to take on additional debt.
Businesses Use Money from Unpaid Invoices for Lots of Things
Unlike traditional business loans, which often come with stipulations about how you can spend the money, your factoring cash can be spent any way you wish. Businesses often use their working capital to:
• Manage payroll
• Purchase supplies and raw materials
• Buy inventory
• Cover high overhead costs
• Pay vendors or secure better deals
• Procure new assets and equipment
• Repair old equipment
• Invest in business growth
• Pay for advertising and marketing
• Cope with unexpected expenses
How Factoring Services Can Help Your Business Grow
Factoring services can significantly contribute to business growth by providing the necessary cash flow to support various operational needs. Companies use factoring to convert their invoices into cash quickly, which helps them manage expenses, invest in new opportunities, and avoid the pitfalls of slow-paying customers.
One of the key benefits of factoring is the immediate access to capital it provides. Businesses often need to improve cash flow to cover payroll, purchase inventory, and pay outstanding invoices. Invoice factoring allows them to do this without waiting for clients to pay, which can take 30 days or more. This immediate cash flow enables companies to seize growth opportunities, such as expanding into new markets or increasing production capacity.
Factoring also helps businesses maintain a healthy supply chain by ensuring they have the funds needed to purchase raw materials and supplies. This is particularly beneficial for industries with high upfront costs, such as manufacturing and wholesale. By securing reliable funding through invoice factoring, companies can negotiate better terms with suppliers and avoid disruptions in their operations.
Moreover, factoring is a flexible funding solution that grows with your business. As your sales and invoices increase, the amount of funding you can access through factoring also grows. This scalability makes factoring an ideal option for businesses looking to expand and thrive in competitive markets.
6 Industries that Commonly Utilize Invoice Factoring
Virtually any company with unpaid B2B invoices can accelerate cash flow through factoring. Many industries use factoring. However, certain industries tap into it more than others.
How Different Industries Benefit from Invoice Factoring
Invoice factoring is a financial tool that has transformed the way many businesses manage their cash flow. Companies use invoice factoring to convert their accounts receivable into immediate cash flow, which is crucial for maintaining operations and supporting growth—industries. that use invoice factoring span various sectors, each benefiting uniquely from this funding solution.
For instance, trucking companies often face long payment cycles but have immediate expenses such as fuel and maintenance. By factoring their invoices, these companies can avoid waiting 30 or more days for payment and instead receive instant cash to keep their operations running smoothly. Similarly, healthcare providers use invoice factoring to manage delayed insurance payments, ensuring they have the funds needed to pay their workers and purchase new equipment.
In the oil and gas industry, smaller firms face lengthy approval processes from larger corporations. Invoice factoring allows these businesses to get the funding they need to cover operational costs without delays. Wholesalers and distribution companies also benefit from factoring, as it helps them manage inventory purchases and improve their cash flow.
Overall, industries benefit from factoring by maintaining steady cash flow, reducing financial strain from slow-paying customers, and accessing the capital needed to grow and thrive.
1. The Transportation Industry
One look at trucking stats, and it’s clear why the transportation industry loves factoring. There are fewer than 100 mega fleets in the country. For context, these mega fleets have 5,000+ power units (engine-containing vehicles that pull the trailer). They don’t even account for one percent of the total number of carriers, but they do account for 53 percent of the total power units, according to OOIDA data. Very small fleets, those with just one to six power units, account for 84 percent of carriers. Their share is ten percent of the total power units. Many are owner-operators.
Both entities have similar challenges—they’re waiting for shippers to pay while trying to meet payroll themselves, cover fuel, manage upkeep, and grab the next load. They’re often competing in the same space too. However, the small and very small fleets don’t have the same advantages as their much larger cousins, and they can’t afford to wait for payment. Trucking and freight companies turn to transportation factoring to bridge the gap.
2. The Healthcare Industry
Similar issues arise in the healthcare industry. Often, physicians wind up battling with insurance companies over unpaid claims, but even when they do pay, they don’t always pay promptly. While large healthcare firms can absorb some of the cost of waiting, smaller practices can’t. In 2020, the Washington Post reported that 19 percent of practices surveyed had temporarily closed due to financial struggles, and 42 percent had to lay off or furlough staff. When an office can’t purchase supplies or equipment, reverse healthcare factoring can help. In these cases, the accounts receivable factoring company pays the supplier to give the practice a bit of breathing room.
Meanwhile, suppliers that serve the medical industry can’t always wait for practices to pay. Particularly in today’s era with rising costs, it’s imperative to get paid promptly. This is where traditional healthcare factoring comes into play.
3. The Oil and Gas Industry
When thinking of the oil and gas industry, most people will list names of multinational corporations, but the reality is these mega corps are often served by much smaller companies. Securing a lucrative contract with a large energy company may sound great at first, but large corporations often have lengthy approval processes for invoices and require multiple signatures before any cash is paid out. With oilfield services factoring, small companies can get paid right away. They can extend more relaxed net terms to win a bid and continue business operations without worrying if their invoice is still cycling through a large corporation’s payables process.
4. The Staffing Industry
It’s easy to think the staffing industry is straightforward. You send people out to work, you get paid, and you pay the team. The reality is much different. First, recruitment agencies invest a great deal of time and money in finding strong candidates. Then, they go through the vetting phase and try to match the candidates to the right opportunities if all checks out. It’s only after this initial phase that employees begin work, and then it’s a long gap of 30, 60, or even 90 days before the staffing agency sees a penny for all their efforts. With factoring for staffing and recruitment companies, the agency gets paid right away, so they can cover payroll and keep sourcing the best talent.
5. The Manufacturing Industry
The manufacturing industry is highly competitive. It’s not uncommon for a manufacturing company to offer flexible payment terms to a potential new client hoping to build a relationship or secure a larger order. At the same time, there’s a large staff to pay, materials and equipment to purchase, and other overhead costs. To improve cash flow and continue to attract customers, companies turn to manufacturing factoring.
6. Service Providers
Countless other businesses in the service industry speed up cash flow with factoring too. A few examples of industries that use factoring to attain steady cash flow include:
- Security companies
- IT service providers
- Consultants
- Marketing firms
- Accountants
- Janitorial companies
Get Your Working Capital from a Leading Invoice Factoring Company
If your B2B company is struggling due to slow-paying customers and cash flow issues, Viva Capital can help. With decades in the industry, a wide array of industries served, and more than one billion dollars funded to the transportation industry alone, we understand what it takes to build a strong business today. Contact us for a complimentary quote or to find out more about the application process for our invoice factoring services.
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