Many small businesses struggle with cash flow, especially when they are just starting out. A new business may be in good financial standing, but is cash poor and needs to pay its employees. Often, businesses in this situation have a stack of unpaid invoices from their customers, meaning the money is coming, just not as soon as they need it.
One of the most popular methods to generate cash is to factor your invoices. Factoring is a financial transaction where a business sells its accounts receivable to a third party at a discount. Invoice factoring companies unlock cash that is caught up in your customers' unpaid invoices, providing you with enough money to continue on to new projects.
After you have completed a project for a client or customer, you send the client an invoice, as usual. The factoring company immediately pays you a percentage of that invoice so you can pursue more work. When the customer pays their invoice, the money is paid to the factoring company, which takes a cut for its services.
In many cases, factoring is the best option for small businesses to sustain healthy cash flow. However, other businesses may benefit more from a traditional loan. If you're seeking alternative financing options, check out our recommendations on business loan and financing options.