Invoice Factoring Mythbusters

Alternative funding options are often overlooked sources of financing, but they can help businesses grow exponentially. Here’s what you need to know about invoice factoring.

Invoice factoring is probably the most unique — and misunderstood — of financing options available to businesses. It’s not a loan or a line of credit, and it’s one of the oldest funding solutions around.

Invoice factoring (also known as factoring or accounts receivable factoring) is an efficient way for companies to accelerate their cash flow. Most businesses have regular expenses they need to pay while working capital is tied up in outstanding invoices. When you leverage invoice factoring services, you can convert those invoices into immediate cash, rather than having to wait several months to receive the money.

So what’s true and what’s not?

We examine 5 common myths about invoice factoring and the truth behind this unique financing option.

1. The paperwork required can be time-consuming and overwhelming

This can be the case for some business loans, but invoice factoring is quite straightforward and easy to set up. Also, you could choose to only factor certain clients’ invoices, to make the process even more streamlined (such as only factoring your top 10 customers’ invoices).

“With financing, it’s important to shop around, do your research and make sure you understand the product. The solution must be transparent and deliver on its promise, and we honestly didn’t see anything that was as easy to understand as what Liquid Capital offered. There’s so much confusing—sometimes misleading—information out there; when you come across a company that’s telling the truth with no hidden items, it’s such a big help. It really gave us a comfort level we didn’t have with other providers.”– Ken Fincher, President, Defense Product Services Group USA Inc.

2. Start-ups don’t qualify for invoice factoring

Many start-ups struggle to qualify for regular financing options, such as loans or lines of credit, and so might think they wouldn’t qualify for invoice factoring. However, because this financing option is an advance on outstanding invoices, rather than a loan, many start-ups can indeed qualify for it.

These are the qualifying factors that we focus on:

You sell products or services to other businesses, not consumers.
Your customers have good credit and consistently pay on time.
Your invoices have payment terms (such as net 30, 60 or 90 days).
Invoices are within specified credit terms and credit limits.

3. My customers might think my business is in financial trouble

While factoring can be helpful for companies with cash flow issues, it’s also a useful financial strategy used by many large and growing companies that want speedier cash flow so they can expand faster.

Many B2B companies are now used to paying their invoices through a factoring company, especially in certain industries. They won’t think twice about it and certainly won’t assume you’re in financial trouble.

4. Invoice factoring is only for large companies

Smaller companies and start-ups may be under the misconception that factoring is only for big businesses with huge numbers of invoices, but this is simply not the case. In fact, Liquid Capital deals predominantly with small and medium-sized B2B companies.

5. The advanced money can only be used for specific expenses

This can often be the case for term loans: banks will only lend for specific reasons, such as for buying equipment or machinery. Invoice factoring is not a loan, however, so it doesn’t come with restrictions on how the money can be used. You can use the money to make payroll, pay monthly expenses or finance expansion — anything you choose, in fact.

Selecting the right funding partner

When using alternative financing options such as invoice factoring, it’s important that you select the right funding partner for your business (or your client’s business).

While there are many invoice factoring companies, not all of them are cut from the same cloth. It’s important that you and your funding partner share common values and a desire to work towards the same goal – accelerating your cash flow and keeping your business growing.