As the economy is growing daily, small businesses are looking for new ways to boost cash flow and beat the competition. Among many financial options, Invoice factoring or accounts receivable financing is one best strategy that has been productively employed by many small businesses. The concept of selling invoices is the same: You sell your invoices to a factoring company in exchange for money. In certain scenario, this makes the factoring company a bill collector firm.
This usually makes a win-win situation for both. The factoring company collects the cash and as a business owner you can focus on your business. Not all the invoices money goes into your pocket, as some goes to the factoring company by way of fees. In return, an immediate cash advance is offered to the businesses instead of lingering to be repaid.
Before opting for invoice factoring, make sure you know how it works and will unfold. Knowing the following pointers can help you with that:
- The maximum advance amount should be just about 50 to 90 percent of the total invoice amount.
- After the factoring company collects the cash, you will get the reminder after their fee deduction,
- Every factoring company charge different fees so make sure you know it before signing the blue print. Generally the factor fee charge is 3 percent along with other fee per week the invoice is overdue.
- If you have good connection with the factoring company, you can have the funds in as little as 24 hours.
Factoring is the only option for businesses that have B2B sales, offering terms for payment between a 1-3 months, or working on final sale basis. It’s not a perfect option for every business – only businesses that invoices in a B2B environment can meet the criteria. The only requirement is outstanding company invoices that can be sold.
Major industries that depend on factoring include transportation services, recruitment businesses, manufacturing and distribution companies, oil and gas companies, commercial landscaping and janitorial firms.
Why Go For Factoring?
As a business owner, you will find many other financial options to boost cash flow or support business growth. Though, it’s complicated for many businesses to understand the concept of invoice factoring. This is because they don’t have much understanding in this regard. Before choosing an option, ensure you compare its advantages and disadvantages with other business financing options, such as small business loan, business line of credit, and credit cards.
In order to avoid irregular cash flow, a business usually turns to invoice factoring. But, there are many other benefits it can bring for your business including, buying equipment, inventory purchase, payroll, rent payment and capacity to get better supplier terms. Every business have different reason when selecting invoice factoring as their financing option. As long it benefits your business, it’s something your business should think about.
Invoice factoring offers fast and effectual source of funding your small business needs to grow. Once you are familiar with the details, advantages, disadvantages and have it compared, you are good to go and can support your future business’s financial condition.