That said, some factoring companies have very user-friendly dashboards which help to simplify and streamline this process. This process can be more labour intensive and time consuming than using a line of credit or a business credit card.

May be labour intensive: Most invoice-factoring companies require you to upload copies of your invoices and potentially supporting documents, too.

In these situations, you may need a traditional business loan. When you need a long-term solution to cash-flow issues, factoring may not be the best option.

Works best as a short-term solution: If you like, you can factor nearly every invoice you receive, but ultimately doing this will cut into your profits.

Some factoring arrangements end up with an effective annual percentage rate (APR) of 20% to 50%, but the amount can vary drastically. Although this rate may not sound like a lot, it can add up.

Often more expensive than other forms of credit: Typically, the fee for invoice factoring is anywhere from 1% to 4% of the invoice’s face value for every week or month from the time the factor pays the advance until the client pays the invoice.

Some potential disadvantages to invoice factoring include:

Offers the potential to get more credit: As your business uses one factoring service, it becomes more likely to extend your available credit line, but this varies depending on the value of your invoices and your clients’ payment history.Accessible to small business owners: Statistically, small businesses are much less likely to receive loans then their larger counterparts, but even small businesses can obtain factoring loans.Relatively easy to obtain: Unfortunately, many businesses struggle to obtain traditional business financing, but because it’s backed by your invoices, factoring tends to be much easier to obtain.This can help you determine which businesses should get extra time to pay and which should be required to pay up front or on delivery. Helps with customer credit management: Most invoice-factoring companies assess the creditworthiness of your clients before extending you any payments on your invoices, and in some cases, factors will also give you information on your clients’ credit scores or histories.Keeps cash flowing: If clients aren’t paying their invoices in a timely fashion, you may not have the cash you need to cover your business expenses, but you can use invoice factoring to keep the cash flowing.If you can’t afford to do that, factoring boosts your working capital so that you can give your clients more time. In other cases, you may want to offer your clients extra time in order to get an edge over the competition. Lets you offer generous payment terms to your clients: Sometimes, you have to offer your clients extra time to pay, because it’s the industry standard.When you use factoring, you don’t have to use any of these assets as collateral. Presents no risk to your capital assets: On the balance sheets, accounts receivable are assets, but typically, they are not as critical to operations as capital assets such as equipment, buildings and land.You retain control over your company and its equity. That isn’t necessary with business invoice factoring.

Doesn’t require you to give up equity: If you accept funds from investors or venture capitalists, you may have to provide some equity in your company in exchange for the money.Doesn’t require you to apply for a loan: Although you have to submit an application to work with a factoring company, the process is usually much easier and less involved than applying for a traditional business loan.Additionally, when you use the same company multiple times, you may be able to get the cash even faster.

Provides quick access to cash: Some factors will advance cash to you within 24 hours of when you submit your application, and even when the funding is not that fast, it’s usually quicker than applying for a business loan.

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

Invoice factoring industry