For companies that have outstanding invoices, money can get tight. This is especially true if you have a business model where you may not receive payment until 30, 60, or even 90 days after the work is completed. Fortunately, your organization’s outstanding invoices are an asset. This means that they can be sold or used as collateral for a loan. Either method can help your company when funds are low, and both solutions are ideal for businesses with poor credit because qualification generally depends on the amounts owed to the company and the customers’ payment histories.

Invoice Factoring

Factoring is the process of selling your invoices to a third party. That company, called a factor, pays you a certain percentage upfront. They then collect the payments themselves, subtract their fees and send you the rest. Not having to prod clients for payment is a relief for many business owners, but some clients may assume you are having financial difficulties if they realize you have sold your invoices.

This method transfers the risk of non-payment onto the third party, so it may be more expensive than invoice financing. However, you receive a percentage of the total value of the invoices upfront. This option may be good for business owners who need funds quickly or who really dislike collecting payments.

When selecting a factor, consider how long the contract is, if you are required to factor all invoices, and how they interact with customers when collecting payment. Remember that even though they are a separate organization, rudeness and other negative traits will reflect poorly on your company.

Invoice Financing

When financing your invoices, you use them as collateral for a loan or line of credit. This means that unless you default, you retain control.

Generally, you borrow a percentage of the total owed to you. Then, as the customers pay, you pay the lender back the amount you borrowed plus fees, including a percentage based on how long the invoice was outstanding. The longer it takes the customer to pay, the more you have to pay the financing company, so this method is best for businesses that generally receive payments on time.

Your outstanding invoices are technically an asset, but they do not help your business flourish until they are paid. Fortunately, financing and factoring invoices allow you to access that money earlier. The cost of these options can be steep, but it’s worth it to many businesses that need liquid capital quickly.