What is invoice factoring?

Invoice factoring is the selling of an invoice to a third party at a slightly discounted rate, in order to receive an immediate payment on the account. After paying the invoice amount to the seller, the invoice factoring company then holds the rights to collect payment from customers directly.

Invoice factoring is a way for businesses to access fast cash, whether they need it to invest and grow the business, or to pay for their own expenses.

On the customer’s side, the benefit is that there is no increase to the invoice amount, no added stress or unexpected fees. Sellers can continue to build strong supply chain relationships while the customer keeps their standard 30, 60 or 90 days to pay.

How does invoice factoring work?

There are three key parties within the invoice factoring process:

• •

  The buyerThe party who’s bought a product or service and will eventually pay the invoice.

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  The supplierThe party issuing the invoice who is providing products or services.

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  The invoice factoring companyThe finance provider who is able to shorten the time-to-payment by lending the invoice amount immediately to the supplier, and later collects this amount from the buyer.

How can you capitalise on invoice factoring?

As a B2B marketplace, you can take advantage of invoice factoring in two different ways:

1. 1.

   Factor your own invoices if you are handling payments to suppliers

2. 2.

   Offer invoice factoring to suppliers on your marketplace

Factor your own invoices

In order to keep suppliers happy, getting payments into their account quickly is key. If you handle payments to suppliers, you could move around your own working capital to get them paid within 24 hours. But this increases financial operation risk, and adds pressure on departments like sales to rush to get new deals over the line. 

Instead of taking on this stress, invoice factoring allows you to manage supplier payments quickly. You can choose to factor all the supplier invoices in one go, or just particularly large payments, for example.

Factoring your own invoices is also helpful if you’re looking to expand into new regions. Where regulatory standards differ across the world, it can be harder to properly verify potential new suppliers and customers, increasing the risk of non-payment. But through recourse invoice factoring, you can eliminate a portion of that risk and build new supply chain relationships with confidence.

Offer invoice factoring to suppliers on your marketplace

You can also offer invoice factoring to the sellers on your platform as a service. They’ll reap the benefits of offering the same extended and flexible payment terms to their own customers, and you’ll generate an extra stream of revenue.

By taking a small percentage of each invoice as a service fee, you can diversify your platform’s income streams and reduce overall operational risk.

In this competitive landscape, where the average marketplace has doubled in size since 2018, invoice factoring enables you to maintain an edge. By offering 24-hour payments to accounts, you can attract new sellers and incentivise current suppliers to stay on the platform.

Ifyou want to offer invoice factoring as a service, partnering with an embedded finance partner can be particularly helpful as such solutions integrate seamlessly with your customer journey, brand, and workflows.

What are the pros and cons of invoice factoring?

Advantages of invoice factoring include:

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  Supplier gets paid immediatelyFast access to cash for the supplier, enabling them to invest in upgrading and streamlining operations or generally stimulating growth

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  Buyer pays laterNo change in invoice terms for the customer, enabling you to continue to build strong relationships by offering the most suitable terms

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  New revenue streamMarketplaces who offer invoice factoring can generate a new stream of revenue and diversify income streams

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  Differentiate from competitionStand out in the competitive B2B marketplace landscape by offering better payment terms to your sellers

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  Boost customer loyaltyGenerate loyalty and improve retention by meeting customer payment preferences

However, there are a couple of things to consider:

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  FeesA small percentage of the invoice amount remains with the invoice factoring company as the service fee

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  Different risk levels based on preferred setupIf opting for recourse invoice factoring, you run the risk of owing the full amount in case the customer can’t pay

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  Direct contact with your customersRemoves control from the seller to chase payment - meaning the invoice factoring company will deal directly with customers

What are the costs of invoice factoring?

Depending on the invoice factoring company, you could be charged in a few different ways, including via:

1. 1.

   A flat percentage fee

2. 2.

   A percentage fee based on buyer payment terms with higher fees for longer payment terms

3. 3.

   A flat percentage fee plus fixed euro amount to cover administration, services to take on accounts receivables or credit controlling services

Suppliers will often find that their fees increase if the payment isn’t collected within 30 days, as more credit chasing is required by the invoice factoring company.  Plus, opting for non-recourse factoring is more likely to result in higher fees in exchange for lower risk for you.

In terms of return on investment (ROI), it’s best to consider how you will use the immediate cash to determine if invoice factoring is ‘worth it’. Companies who have had a positive experience with invoice factoring have used the cash to invest in streamlining their operations, for example, or securing an important retainer client by supplying a large order upfront. This means that the long term gains outweigh the initial fees associated with invoice factoring.

How to choose an invoice factoring partner?

If invoice factoring is the right choice for you, then you’ll move into the decision-making phase. This next step is about gathering the right information on factoring providers, and comparing the offers to find the right fit for your specific business needs.

Here are some factors to consider before you choose an invoice factoring provider:

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  Geographical coverageWhich countries do they serve, and does that fit into your current and future operational plans?

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  Buyer eligibility and limitationsWhat share of buyers can you factor against, and what limits might they get?

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  SpeedHow fast can funds arrive in your or suppliers account?

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  FeesWhat percentage of the invoice is kept by the financing provider?

How finmid can help

With proven success in white labelled invoice factoring services for B2B marketplaces, finmid can help. Invoice factoring is weaved into our overall embedded finance package, where marketplace founders are able to plug-and-play the financing options best-suited to their specific needs.

Through invoice factoring, we’ve been able to help B2B marketplaces grow by order volume by 45%, while average order value has shot up by 35%.

What’s more, with broad customer eligibility criteria, finmid can make invoice factoring accessible for at least 80% of buyers in the European region.