In this blog post, we are going to shed some light on what are the options with businesses to receive money through invoice factoring. But before that, let’s understand what is Invoice Factoring and how invoice factoring works in brief.

In simple words, Invoice Factoring is to sell your outstanding or unpaid invoices to a third party company (factor) to and borrow against those invoices to improve cash flow and reduce bad debt. The factor is then onwards responsible for collecting the account receivables (invoices) from the clients. Once the clients pay to the factors then your business will receive the rest of the balance after deducing some percentage fees.

If any business has more than a few unpaid invoices then it is advisable to take the assistance of the said invoice factoring. Moreover, businesses also benefit immediately in terms of getting their cash flow streamlined. Additionally, the business saves time from processing a billing invoice and to deal with small payments. The critical benefit is that invoice factoring allows business from any bad debt as third-party buyer takes all the risk if the invoice is not paid.

Here is a list of thing that businesses can do with the money they receive through invoice factoring:

1) Improve Cash Flow

The most tedious thing with unpaid invoices is to not know exactly when you’ll get paid? The money is sure to come but not sure of the time you’ll see it in your account. Thus, affecting the company’s cash flow. Invoice factoring helps you to come out of this distraction and focus on your business rather than the payment.

By borrowing against the value of unpaid invoices, you’ll at least be sure of a certain amount and moreover, it brings balances to your everyday finances and lets you worry less about chasing individual payments.

2) Instant Short-term Finance

Were you counting on few hefty invoices for the payroll and Christmas bonus? Or incurred any office repair expenditure? At such a time instead of scouring through your accounting books, it’s better to opt for invoice factoring as it is faster than obtaining a business loan or line of credit.

Loans generally require lengthy paperwork and applications, assets, and time in approval and disbursements. Businesses can’t wait this long to bring order to their day-to-day cash flow. In such a scenario, invoice factoring plays a major role.

3) Access Work Capital Easily

Maybe your company is doing great in finance and operational cost on a month to month basis. But the client’s expectation for the account receivables can go surplus for the invoices to be paid on time.

Additionally, invoice factoring helps you to move up the ladder to increase working capital as a lump sum payment to apply anywhere in your business as you may seem fit. You can easily increase the number of liquid funds in your books and use it for any purpose.

4) Invest In Growth Factors

If you are thinking of handling a new project and require fund or if your business is going to receive a large order from existing or new client and you need extra fund for resources to accommodate for the project then you can consider going for invoice factoring.

It is easier to go for invoice factoring by just calling up the resources anytime you feel that your business is going to need funds from account receivables for any new or upcoming projects or new initiatives that may seem possible.

5) Managing Reputation

Invoice Factoring allows small businesses billing app to maintain cash flow without impacting their line of credit with the clients with the extra funds that will help them to maintain business relations and their reputation in the industry.

You can always build business credit as you are free to use the money received by invoice factoring to pay off business debts. Hence, invoice factoring also helps you in maintaining and building your credit in the community.

Recurring Payments Vs Recurring Invoices

Recurring Payments	Recurring Invoices
Recurring payments charge the customer’s credit card account or debit card account on a predetermined schedule for the same amount as preapproved.	Send an invoice to your customer on a regular basis. The client receives the invoice but, money is not paid unless the customer approves.
A business that takes prepayment of money and sells a monthly subscription service and product. Subscription services are excellent examples of this.	A company that provides fixed services with billable hours is an excellent choice for recurring billing. For example law firms and consulting agencies.

Pros and Cons of Recurring Invoices

Pros	Cons
You eliminate the possibility of human error by automating the billing process. If you use a recurring invoice, you will not be concerned about forgetting to charge your customers for the things they ordered.	You must exercise caution while recurring billing to prevent issuing inaccurate pricing. This also holds for price changes that could take place right once an invoice is created.
If you provide your customers with the option for recurring billing, they are more likely to buy products regularly.	It could be difficult to cope with recurring invoices if a transaction fails for any reason.

Net 45	Invoice is due in full within 45 days with no early payment discount offered
2/10 net 45 terms	2% discount if you pay within 10 days; otherwise full payment of the invoice is due in 45 days
1/15 net 45 terms	1% discount if you pay within 15 days; otherwise full payment of the invoice is due in 45 days
1/10 net 45 terms	1% discount if you pay within 10 days; otherwise full payment of the invoice is due in 45 days
1/7 net 45 terms	1% discount if you pay within 7 days; otherwise full payment of the invoice is due in 45 days

Category	Net Method vs. Gross Method	Explanation
Calculation Approach	- Applies tax credits first; reduces taxable income before computing tax liability.	- Doesn't apply tax credits; computes taxable income without considering tax credits.
Tax Credit Eligibility	- Allows for greater likelihood of tax credit eligibility due to reduced taxable income.	- Limits tax credit eligibility because taxable income hasn't been reduced yet.
Itemized Deduction Requirement	- Lowers threshold requirement for itemizing deductions due to decreased taxable income.	- Raises threshold requirement for itemizing deductions due to higher taxable income.
Advantages	- Leads to lower taxable income and increases chances of meeting qualifications for other tax benefits.	- Results in higher taxable income compared to net method.
Disadvantages	- May miss opportunity to reduce tax burden if taxpayer doesn't itemize deductions or take advantage of tax credits.	- Increases taxable income and may result in higher overall tax bill.