Invoice funding has become a popular way for small-business to meet their financing needs. As small businesses feel the credit crunch, they are opting for alternative ways to fund their growth and sometimes, simply to pay their bills. Since the recession, banks are less apt to loan out money especially to those that aren’t a great credit risk. This often means that even companies with good and decent credit will find it hard to raise the capital they need through debt. Invoice funding, also known as invoice financing, is quickly becoming the go-to method in some industries. This is especially true for small businesses.
Small businesses were amongst the hardest hit in recession, not only did sales drop but they had (and continue to have) the worse chance of being eligible for a bank loan. It was difficult prior to the recession and now it is almost impossible to get a loan. Invoice funding allows small businesses to receive cash based on work they had already completed and not rely on banks.
A company that bills their customers will complete jobs and then get paid afterwards. It may take up to 90 days to see any money from a job that has been finished and paid for. This means that these companies have to come up with operating capital to pay workers and also for any materials that were necessary to do the work, from their own resources. For a small-business this can be very draining. In fact, it can even be difficult for larger businesses.
However, typically big companies often have so many clients that they may have more cash on hand. Also, even if they find that they need money, they can apply for loan and have a better chance of securing one because they likely have more assets and have been in business longer. A small-business does not have any of these advantages, at least not in many cases.
Invoice funding allows small businesses to sell their invoices to a factoring company. This is a way for them to make money from jobs already completed much sooner then they would otherwise. In fact, the factoring process from beginning to end can happen as fast as three days but may take a little longer if this a company is involved in the process for the first time. This is because they will have to set up an account and hand over either their customer’s credit applications or information. This is because if a company’s customers have bad credit, it may be difficult to attract a factor. While it is not necessary for the company itself to have good credit, the people that owe them money must have.
The factor will pay for the invoices at a discounted rate, somewhere between 80-95%. They will then collect these monies, return them to the original owner of the invoices and then subtract their fee. The process can be very easy and can be straightforward.