Your small business is thriving and expanding while providing products or services to companies and customers.
But lately, you have noticed troubles with your finances as some customers fail to meet the payment date on your invoice. So, even if you have sold all your products or services, you still need help covering operating costs and expenses.
As a small business doing B2B or business-to-business transactions, you want to avoid waiting long for payments. If this challenge persists, you may not have the immediate cash flow to pay utility bills and your employees, which will put your business at risk.
Thankfully, B2B factoring or invoice factoring can help you solve it. This article will cover invoice factoring and how it works for B2B transactions.
What is B2B factoring?
Business-to-business or B2B factoring is a practice wherein a business sells its unpaid invoices or accounts receivables to a third party called a factoring company in exchange for a cash advance. In a B2B factoring transaction, the factoring company pays a portion of the accounts receivable.
In turn, the factoring company will collect the total amount of the accounts receivables indicated in the invoice it buys. Once all the customers pay, they give the remaining amount to the selling business. But it deducts a factoring fee of 1% to 5% of the amount.
How Factoring Works in B2B Transactions
B2B factoring is popular today because of financial security. It provides funding and reduces the hassle of collecting accounts receivables, allowing the business to streamline operations. Aside from these, other important roles of B2B factoring are the following.
Improved cash flow
Accounts receivables are recorded as part of sales. But in reality, it is not recognized as cash since actual payments have yet to be collected. The problem arises when customers do not pay on time or wait until the deadline. Factoring improves cash flow as the company gets immediate cash to cover bills, salaries, and accounts payables on time.
Faster payments
Small businesses often receive payments from factoring companies within one to two days. In banks, you will wait longer and may not get approved.
Less responsibility
With B2B factoring, you surrender your accounts receivables collection responsibility to the factoring company. Doing so gives your business more time to focus on other important matters. It allows you to create strategies to get more customers and projects and improve payment collection processes. In the long run, you can find ways to strengthen your market positioning and even expand.
Low credit risks
Once you get a factoring company, you also pass the customers’ credit risk to it. Many factoring companies like Rev Capital check customers’ credit scores, not your business. B2B factoring also helps your business avoid unwanted debt.
Payment without collateral
In factoring, you won’t have to go to banks and lending institutions to borrow and incur an interest expense. Payments are more excruciating if you turn to payday lenders, given their unrestricted borrowing costs. Factoring does not require collateral like your business real estate or inventory.
Bottom Line
As more businesses enter the market, more B2B transactions may take place. With the still challenging macroeconomic landscape, payment delays and higher interest rates can be problematic. However, with B2B factoring, businesses can keep enough liquidity to sustain their business and meet payables on time. It lowers the value of your accounts receivables but removes the hassle of collecting payments and the risk of borrowing with high interest.