Business Financing 101: Learn How Invoice Factoring Works

Business Financing 101Business factoring is not new. However, it is quickly becoming an increasingly popular option for companies looking to raise capital quickly and without taking on new debt. While some businesses have been using invoice factoring for some time, others either have not heard of it or only have minimal knowledge regarding it.

This article will act as somewhat of a brief introductory course, a business financing 101, so that readers can learn how invoice factoring works. Hopefully, businesses will begin to understand that this is an extremely effective and fast way to infuse cash into their coffers.

Invoice factoring requires three things, a business that invoices their customers and has outstanding receivables, a reputable factoring company, and customers with good credit. If all of these things are in place, it may be possible to strike a deal.

A Factoring firm will purchase a business’ outstanding invoices at a discounted rate, typically between 70%-90% of their full value. For example, if a company has outstanding invoices of $100,000, a Factor may purchase them all for $90,000 or 90% of their value.

After the purchase of invoices, the collection is done by the Factor so that they are able to recoup their money. To accomplish this, they act as a collection agency as sorts, sending out invoices again if needed and contacting delinquent or late pays. Once they have received payment for all of the invoices (or as they come in), they will hand over all monies back to the company they purchased the invoices from, minus a pre-arranged fee. Many factoring companies charge between 3% and 5% for their services.

There are many benefits to invoice factoring. They are as follows. The process is fairly simple once a business understands the basics. Factoring allows companies to get money within days rather then waiting the weeks or months it might take to obtain a bank loan. It allows companies to raise capital without taking out a loan.

Businesses are able to collect money based on the value of their invoices without having to wait for the payment. This form of financing doesn’t require a business to have good credit or to have been in business for a certain amount of time. Companies generally have to have good credit and been in operation for a certain length of time before they can qualify for a bank loan. This isn’t the case with invoice factoring

Invoice Factoring Benefits

a. A process is Simple: The factoring process if fairly simple. If a company has customers with good credit and are in an industry where factoring makes sense, this can be an excellent option. It generally takes about a week or two to work out the agreement for the first time. After that, the process tends to work really smoothly.

b. Fast Money: After a relationship with a factor has been established, it is possible for a business to obtain monies in as little as 24-48 hours.

c. No Debt Required: Invoice factoring does not require the use of debt.

d. Upfront Cash: Instead of waiting around for invoices to be paid, a company can get paid from them sooner rather than later.

e. Past Credit Issues Don’t Matter: Factors don’t look at the credit score of the business but that of the business’s customers. Therefore, past credit issues don’t matter.

f. New Businesses Are Eligible: As long as the company has invoices from quality customers, factoring is a possibility no matter how long a company has been in business.

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