The Fundamentals of Invoice Factoring

It is usual for small businesses to experience cash flow gaps. Fortunately, there are numerous methods that they can rely on to settle urgent business needs. Invoice factoring, for instance, helps businesses with slow-paying customers to access instant funds for their immediate expenses. This alternative method of financing is increasingly becoming popular due to the many benefits that the borrowers enjoy. Keep reading to know more about invoice factoring.

Invoice Factoring Explained

Invoice factoring is also known as debt factoring. It allows small businesses to sell the invoices to factoring companies, which in return, gives them cash to settle their emergencies. Debt financing is a short term financing option, and it is therefore not ideal for significant capital investments.

Invoice Factoring Qualifications

  • You should have a business
  • Your business should offer services to government or commercial clients
  • Your client should have an excellent credit rating
  • You should have a reasonable payment plan for your tax liens

How It Works

When the borrowing business applies successfully for the funds, it sells the invoice to the factoring company, known as the factor. The invoices issued to the factor should have a short payable period of fewer than 90 days. The factor reviews the invoices and then uses their value to set a maximum amount that they can offer to your business. If your customers pay on time, your business will stand a better chance of getting a higher amount. After that, the factor issues an advance payment of approximately 80% of the agreed amount. The advance amount depends on the riskiness of your business, and the number of transactions you make per day. Once you clear the debt, the factor will settle the remaining amount as per the agreement.

Benefits

  • Easy to obtain loans- it is easy to get funds from a factor as compared to seeking financial help from banks. Moreover, the factor does not consider your credit rating, since your clients are the determinants.
  • Enhances your cash flow- debt factoring helps businesses to acquire cash at hand when they need it. It, therefore, improves business cashflows.
  • Easy deployment- the application process is simple and straightforward. Also, the disbursement takes a maximum period of one week.
  • Ideal for small business- invoice factoring helps small enterprises to get finds, even when they do not have collateral.
  • Financial independence – no restriction on how you can use the borrowed money.

Invoice factoring is a reliable short term financing option for small businesses. It uses the customer invoices as collateral, and the clients take a maximum of 90 days to repay the factor.

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