In today’s marketplace, cash flow is a real problem for many businesses. It seems impossible to grow your business if you don’t have a stack of cash sitting around. But it is possible to grow without having a bunch of money just lying around, and you don’t even have to be able to qualify for a traditional bank loan. You don’t need to have two years of financial information showing that you made a profit. You don’t need to have assets that are tangible in order to secure a bank loan. Instead you can secure the funds through invoice factoring.
Here’s How the Process Works.
The invoice factoring company buys your accounts receivables at a discount. Then they give you cash up to a certain percentage of the amount your customers owe you. The easiest way to look at this process is as if you’re selling your invoices for a little less money than what they are actually worth so that you can receive cash now instead of in a month or two when your customers actually pay you.
Every time you make a delivery and bill a customer, you are eligible to receive money from an invoice factoring company within a day. This makes it possible for you to get paid faster, which in turn enables you to grow your business. You’re able to pay your own bills on time because cash flow isn’t a problem. You can even purchase supplies or equipment or receive special discounts offered by vendors when you pay them early.
In most cases, factoring companies pay anywhere from 80 to 90 percent of the value of your invoices up front. After they receive the payment from your customer, they subtract a small fee from that payment and give you the rest of it. The amount of the fee is determined by how creditworthy your customer is, how long your average payment term is, and the amount and size of the invoices you issue.
It may seem like invoice factoring is a new business, but it really isn’t. Invoice factoring companies have been offering services for hundreds of years. Some of the earliest factoring companies appeared in the American colonies. They helped handle trade between European vendors and colonial buyers. The vendors would trust the factoring company when it said that the buyer was creditworthy. They charged a small fee for offering advice about credit and then became merchants in the trade industry by purchasing and then reselling a variety of goods.
There are factoring companies in every part of the financial sector. Some are small financial services companies while others are connected to major banks. However, each one sets its own terms for operation. Each company has its own “personality” within the factoring industry. In addition, many of them specialize in one particular type of industry, so if you are considering signing up for factoring, make sure that the company you opt for does business with other companies in your industry.