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Invoice Factoring: How it Works and When it is a Good Idea

Invoice factoring is a financial product where a business sells its account receivables to a factor. In explicit terms, a business presents its invoices to another company (called a factor or factoring company). It receives a percentage of the value of those invoices in cash from the factor. The factoring company goes on to collect the unpaid invoices from clients, then sends the due percentages to the business after deducting an agreed fee. 

While invoice factoring can be an option for your small business if you meet the requirements stipulated by the factoring agreement, it bears many limitations. LQD offers some of the best alternatives to invoice factoring, including flexible business loans of up to $10.0M delivered in less than 30 days. Before delving into why LQD options are the best alternative to invoice factoring, it’s best that you familiarize yourself with the invoice factoring basics. 

How Invoice Factoring Works

Invoice factoring starts with a business supplying goods/services to creditworthy clients on credit. The following steps follow:

  • Step one: The company presents outstanding invoices to invoice factoring companies
  • Step two: The factor carries out a risk assessment and determines if the client meets invoice factoring requirements. Risk levels vary from client to client and among industries.
  • Step three: The business is advanced a percentage of the values of invoices if it meets the requirements. The rate averages 80% but can be as low as 70% and as high as 90%.
  • Step four: The factoring company collects outstanding invoices. Usually, debtors pay directly to the factor’s account, who keeps all amounts advanced to the business. If the company received 80%, 20% pays the factoring fees. After fee deduction, the company gets net amounts.

The amount advanced by the factoring company to the business is not a loan. When account receivables are used as collateral to secure loans, the transaction becomes invoice financing.

When Is Invoice Factoring a Good Idea?

Many scenarios can push a business into resorting to invoice factoring. If there are no other options, it applies when:

  • When cash is needed urgently: Invoice factoring provides fast cash if working capital falls below a certain level. Illiquid businesses are unable to meet operating expenses when they arise. Payment terms may allow debtors up to 120 days, and cannot support urgent liquidity needs. Factoring bridges the gap.
  • When there is no collateral: Small businesses and start-ups may have inadequate collateral after asset aggregation. Invoice factoring requires no collateral. If a small business has unpaid invoices causing cash flow problems, then invoice factoring is the transformative solution they seek.
  • In case of inadequate debtor follow-up resources: Businesses, both small and large, may have large or widespread credit customer bases that require a considerable amount of resources to follow up. Invoice factoring companies have integrated debt collection solutions to create an upside market value at a reduced cost.

Advantages of Invoice Factoring

Often, businesses turn to invoice factoring because of the following advantages:

  • Offers quick access to cash: It’s usually quicker than applying for a business loan. When you use the same company many times, you may be able to get the cash you need even faster.
  • Easier to apply: Compared to traditional business loans, the application process for invoice factoring is much easier and less involved.
  • No equity required: When dealing with venture capitalists and investors, you may be required to provide some equity in your company in exchange for the funds you need. With invoice factoring, no equity is required, thus allowing you to retain control of your company and its equity.
  • No collateral required: Unlike traditional business loans that require borrowers to put up collateral, invoice factoring does not require borrowers to provide collateral, thus presents no risk to your capital assets.
  • Helps with credit management: In most cases, an invoice-factoring company will evaluate the creditworthiness of your clients before extending you any payments on your invoices. Your clients’ credit scores and histories can help you determine which businesses should be required to pay upfront, which should pay on delivery, and which should get additional time to pay.

Limitations of Invoice Factoring

. Invoice factoring is not the ultimate solution. The desperate need for cash overshadows its limitations. 

  • Invoice factoring is a narrow solution to solve debt problems only. Cashflows from its proceeds are insufficient for expansion and asset acquisition.
  • Invoice factoring may destroy customer relationships as a third party sends reminders to customers.
  • It is costly. The process of canceling factoring agreements is extraordinarily expensive.

Options That LQD Provides

LQD Finance offers to collaborate with businesses and provide transformative alternatives to invoice factoring. The solutions meet dynamic business needs for increased efficiency and increased returns. It offers diverse, custom-made solutions with a unique model to create scale.

Due to a proprietary technology that sets LQD apart from competitors, higher accuracy based on data actualizes finance options of up to $10M in less than 30 days. Our revolving lines of credit apply to Purchase Order Financing, Growth Finance, Expansion and Acquisition, and Refinancing purposes.

Why Choose LQD Options as an Alternative to Invoice Factoring

Should your business need increased cashflow at an accelerated pace or experience a lack of resources for rapid growth, LQD Finance provides solutions superior to invoice factoring. LQD is different because:

  • LQD financial solutions sweep wide across your business needs. They are integrated into the business without disrupting customer relations to provide the organizational support needed to attain the increased capacity to supply.
  • Unlike invoice factoring cash injections that are barely sufficient for business growth, LQD solutions provide working capital and growth funds in one bundle. Your business gets the opportunity to experience a paradigm shift towards the future firm you desire it to be. As your business is growing, flexibility is guaranteed.
  • LQD credit lines can finance increased automation equipment, inventory, and workforce. Your business gets the entire solution to expansions, acquisitions, and consolidations without worrying about liquidity issues.
  • Other than just offering liquidity like invoice factoring, LQD provides advisory services. We articulate the future of the business and optimize resources to prepare for the future.

Gain the LQD Finance Advantage

For your business to grow, it deserves streamlined, flexible, accelerated, custom finance options to guide it to increased performance. At LQD Business Finance, we can create custom business funding solutions for your unique needs.

Contact us today to find the best financing solution for your situation.

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