If you don’t want the uncertainty of waiting for payment on your invoices, you can sell invoices to another company. This is called invoice sales.
Invoice sales is a financial strategy that some businesses opt in to in order to maintain a good cash flow. An invoice sale is the process of selling an invoice to a bank or to another company.
You get paid immediately, and the bank or company charges you a small fee.
The benefits of invoice sales
With invoice sales you receive money immediately, rather than waiting for clients to pay.
These are the benefits:
- You ensure good cash flow, meaning you have more money coming into your business than going out of your business, and that you’re able to cover incoming invoices from suppliers and unforeseen expenses. The invoices you sell are also considered very liquid assets, since they’re quickly turned into cash.
- You don’t have to spend time following up with customers, and can instead spend your time and effort on generating more business. The bank or company that buys your invoice now has to collect payment from the customer.
- You guarantee payment on every invoice
The downside is, of course, that you don’t get paid the full amount; the bank or company that purchases your invoices takes a small fee. This is usually a percentage of the invoice amount, so the larger the invoice amount, the more of a fee you pay.
Another downside can be that the clients don’t appreciate the follow-up strategy of the company that buys your invoices. Make sure to do some research to find a good invoice sales option that will maintain your good customer relationships.
What is factoring?
The phrase invoice sale is usually used about one-off sales, while factoring is used about the process of selling all your invoices. In this case you enter into a contract with a factoring company who will take care of all your invoices.
This can be a good idea if you require a good cash flow and good liquidity. It can also be a good idea if you have customers with bad payment history or bad credit, although you risk that the factoring company isn’t willing to take on these clients.