Factoring is a form of business financing where a business receives cash against outstanding invoices from customers. Some invoice payments delay but that does not mean your business should come to a halt. You still need to work even if your customers are not paying their invoices. However, non-payment of invoices on the part of customers can result in cash flow problems. Some people acquire business loans to sort out the problem. Unfortunately, some business loan applications take time, and you may end up getting the cash at the wrong time.
Some business owners do not want to experience this problem and that is why they prefer invoice financing. With invoice financing, you can get the cash in your account within 24 hours. When you need cash urgently and you have reliable customers who have outstanding invoices, you can visit a reputable factoring company. They will verify the payment history of the customer and then they will offer you cash for the invoices. They usually offer 70% to 95% of the value of the invoice. This means that if a customer owes you $1000, the factoring company is likely to give you between $700 to $950 for your invoice.
The value of the invoice depends on two main factors. The first one is the size of the company. If the company is big, the invoices are valued higher than invoices from small companies. Another thing that determines the value of the invoice is the age of the invoice. New invoices are valued higher than old ones.
Invoice factoring offers quick cash to people who need money urgently for their business. If customers have outstanding balances and you are certain that they will pay, you can factor that invoice. Invoice factoring process is also easy and if you do not qualify for a business loan, you are likely to qualify for invoice factoring. You can receive the cash in less than 24 hours after application. The most important requirement is the customer’s payment history. When you factor your invoices, you do not need to worry about unpaid invoices. The outstanding invoices become the responsibility of the factor. You will no longer need to task yourself with the collection of invoices.
Invoice factoring is expensive and you may end up paying more than you planned for if the customer does not pay on time. Some factoring companies also lock up their business in contracts and all invoices will be funded by the factoring company. due to the contract, the business will still need to factor the invoices even if he or she can wait for the customer to pay the invoice.
Although you can walk into any factoring company and receive cash for your outstanding invoices, you will need to deal with a company that offers favorable terms. This is how to choose a factoring company.
Recourse factoring means that the factoring company is not entirely responsible for the outstanding invoices. If the customer is unable to pay the invoice, the business takes responsibility for the outstanding invoices.
Non-recourse, on the other hand, allows the business to sell the invoices to the factoring company. In this case, the factoring company is entirely responsible for the invoices. The factor assumes all the risks associated with the invoice.
Some factoring companies offer both recourse and non-recourse factoring.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.