As a small-business owner, you can turn your unpaid customer invoices into fast cash with invoice factoring and its closely related counterpart, invoice financing. These options are best for business owners whose customers don’t pay for goods or services right away but who need cash now to run their business.
Technically, invoice factoring is not a loan. Rather, you sell your invoices at a discount to a factoring company in exchange for a lump sum of cash. The factoring company then owns the invoices and gets paid when it collects from your customers, typically in 30 to 90 days.
Let’s say you own a hardware store and sell goods to another business, creating a $10,000 invoice. Your customer agrees to pay off its invoice in 30 days, but you need the cash next week to pay your employees. You’ve got a cash shortfall. So you turn to an invoice factoring company, and it agrees to buy your invoice for $9,700 in cash — $10,000 minus a 3% factoring fee ($300). The invoice factoring company advances 85% of the invoice (or $8,245) within a few days. The factoring company then collects the invoice when it’s due and provides the remaining balance owed to you ($1,455).