What are the benefits of invoice factoring? If you are a small business owner, you can easily turn unpaid invoices into working capital. Rather than waiting for weeks or even months to receive payment from customers, you can get cash advance by selling customers’ invoices at a discount. This can be the best option for business owners who do not receive immediate payment from their customers and need funds to manage the daily business operations. The best part of it is that you will be accessing funds that you have […]
If you are a small business owner, you can easily turn unpaid invoices into working capital. Rather than waiting for weeks or even months to receive payment from customers, you can get cash advance by selling customers’ invoices at a discount. This can be the best option for business owners who do not receive immediate payment from their customers and need funds to manage the daily business operations. The best part of it is that you will be accessing funds that you have already earned, and you don’t have to worry about any future debts. Invoice factoring is also referred to as accounts receivable financing or invoice financing. Invoice factoring is meant to solve short term financial problems. The funds can be used to cover payrolls, repair equipment, pay suppliers and other day to day expenses.
Small business owners can at times be at a fix. There is a new client who wants to do business with you, but there are some customers who have yet to pay their invoices and you do not have enough funds to take up new orders, which forces you to say no. But this problem can easily be solved by invoice factoring.
Invoice factoring usually involves three parties:
For instance, you run a furniture store and sell goods to a customer, creating a $10,000 invoice. The customer promises to pay the money within 90 days. But you may still need cash to pay your employees at the end of the month. This means that you will be short of cash. You can still have the option of taking out a loan in a traditional bank. But chances are that you will be required to issue collateral, which will be sold if you default. Even if you qualify, you may have to wait for weeks for the loan to be processed.
Another option is to sell the invoice to the financing company and receive an advance in return. This advance is usually between 70% and 90% the value of invoices. Once the invoice is paid, the financing company forwards the remaining percentage less the fees. In the end, all the parties involved will benefit – the business gets an advance, the customer has ample time to pay off the invoice and the financing company, also referred to as the factor, collets a fee. The fee or discount rate can range from 1% to 5% depending on your sales volume, invoice amount and the creditworthiness of the customer. With invoice factoring, the financing company collects the invoice payments that they are financing. The factor here will directly approach customers for invoice payment. This is different from invoice financing in which it is the business that is responsible for the customer’s payment.
If you need instant cash to cater for your business operations, invoice factoring is worth considering. First, it has a simple and straightforward application process, and secondly, the approved rates are higher compared to those in traditional lending institutions.
Having being around for decades, invoice factoring is an established industry. But many small business owners are still not familiar with factoring services. There are also big changes in the industry, mainly due to the emergence of online invoice factoring companies. Here are the important things to look for in a good invoice factoring company.
With invoice factoring, the accounts receivables are sold and not issued as collateral for the loan. The result is that the receivables are converted into immediate cash rather than waiting for several months for your customers to pay. The collection cost, time and efforts are placed in the hands of the funding company, and this will give you time to work on the crucial aspects of your business. The good thing with invoice factoring is that you will be able to receive funds for your business when you need it, and you can easily manage your business without any financial constraints. Invoice factoring can come in handy for companies that need quick funding and for some reasons, they are not able to access a loan from conventional bank loan. Before purchasing their invoices, invoice factoring companies will research your customers’ credit history to ensure that the business has a history of paying bills
The qualifications for invoice factoring are much easier compared to other long term financial options. Credit scores, business profitability and annual revenues are some of the things that lenders look for in long term financing, but this is not the case with invoice factoring. The main things that most factors consider include the account receivables, article or organization or incorporation and the most recent tax returns. Some factoring companies may also consider the time you have been in business and a minimum credit score.
Factoring financing can look more complicated than securing a loan in a financial institution. But with factoring, you can borrow money against unpaid invoices to help meet your immediate business needs. The cost of factoring is also affordable, provided your clients make timely payments. If your customers pay invoices on time, there is no doubt that your business will benefit from invoice factoring.