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The Fundamentals of Invoice Factoring

Your small business has been doing well since you started but a time comes, and you hit a rough patch. Suddenly, there is a cash flow challenge, and you need a fast solution to help with the company’s expenses for the next two weeks. A business associate recommends invoice factoring, and you contemplate its suitability. Think of invoice factoring as a faster alternative to a bank loan. What happens is that a company with outstanding invoices uses them as collateral to get money from an invoice factoring institution. Invoices can be due in 30, 60 or 90 days. In this process, there is you, who issued the accountant receivables, the financial entity that will be responsible for the financing, called the factor and the client that owes the invoices called the debtor.

Suitability

Lagging behind on expenses is unacceptable, and sometimes not a lot of financing options are available to companies. Imagine having to delay the payroll because a corporate client is due to make payments yet. By using a factoring company, you can avoid ending up in sticky situations like running out of money to pay the internet or electricity bills. Invoice factoring may be just what you need to capitalise on an expansion opportunity that just presented itself suddenly.

The Long of It

Invoices are issued when a company delivers goods or services to a client. Now, what you do is sell that invoice to a factor. The finance company pays a certain percentage of the money. There is an advance payment that depends on many aspects, but you can expect between 70-90%. There is also a fee that is paid to the factor, usually between 1-5%. This fee is dependent upon various elements like the value of the invoice and the creditworthiness of the client. It means that the total amount of cash you get from the factor will be less the discount fee. The factor then collects the invoice from your customer and pays the remainder of the money. If you had intentions of taking in more work or maybe purchasing material for your hardware business, such an arrangement makes it possible.

Uninterrupted Business

Using invoice factoring to finance expenses has its advantages. Perhaps the most important one is that you can keep business operations going. A cash flow problem can stall many things like payroll, material purchases or paying for overhead expenses. With invoice factoring, you have less stress and more focus for your business.

No Long Waits

Invoice factoring companies work very fast. You can apply and get your money in a span of 3-4 days. Even when you have to wait long, it doesn’t take more than a week. If you are lucky to find a factor that allows electronic applications, then the approval process period is even shorter. Compared to other lending alternatives such as banks, you don’t have to put things on hold until the loan approval goes through.

Exercising Caution

B2B and B2G businesses that seek the services of a factor should exercise caution. One drawback of working with a factoring company is getting sucked into a long-term contract that doesn’t benefit your business. Understanding penalties and monthly minimums is critical when using a factor. Take the time to learn more about how factoring companies operate and the best way to pick a suitable one.

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