What is Invoice Factoring?
If you are a business that invoices your clients and customers instead of collecting payment up front, you have probably experienced the frustrations of waiting for a client to pay on their invoice. This waiting period can cause your business to see uneven cash flows and long payment cycles. This can be detrimental to a business, especially one trying to grow.
In fact, a 2017 study by Business Insider finds that the number one reason businesses fail is due to cash flow problems. Steady cash flow will allow your business to the freedom to do things such as:
- Meet Payroll
- Pay Company Expenses
- Purchase New Equipment
- Fund Marketing, Sales Expansions, and More
What are the Different Methods of Solving the Cash Flow Challenges?
You can solve your company’s cash flow challenge through a number of different methods.
- Invoice Factoring
- Secured Bank Credit/Loan
- Credit Card
- Unsecured Line of Credit
While there are pros and cons to each available option, most can be time consuming and costly. Invoice factoring provides your business with the means to quickly obtain the cash needed to run a successful business while maintaining lower upfront cost.
How Does Invoice Factoring Work?
Invoice factoring occurs when a business sells its invoices to a factoring company. The factoring company will pay 75-95% of the invoice value and will collect the payment directly from your customers. Factoring is not a loan; it is an agreement to sell your invoices at a discounted rate with the factoring company assuming the credit risk for the purchased invoices.
Why Choose Factoring for Your Cash Flow Needs?
Factoring is a great option for businesses who are looking to solve cash flow needs without taking out a loan or paying large interest fees on lines of credit. When you factor, you are selling your invoices to a factoring company. In return, you not only get quick access to cash flow, but also other additional services such as credit protection, free credit checking services, collection services, and more.
How to Choose a Factoring Company
Once you’ve made the decision to factor your invoices, you will need to choose a company. There are many options available to you, so be sure you choose a company with the knowledge and expertise needed to successfully aid your business. Look for factoring companies who are upfront about fees and what services you receive in return. These services include the level of company resources, protection offered, fund availability, and more.
What Are the Typical Business Requirements Needed for Invoice Factoring?
Acceptance from a factoring company boils down to three main requirements:
- Your business’s accounts receivable must be free of any liens or contingencies
- Your customer must be creditworthy and capable of paying invoices within terms
- You must have documentation proving services rendered or product received and accepted
As long as you are solvent, your credit rating should not disqualify you from working with a factoring company as it would with many other options. Your reputation for providing a good service or a good product is one of your main qualifications.