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Business Financing 101: Learn How Invoice Factoring Works

Business Financing 101

Learn How Invoice Factoring Works

Business factoring is not new. However, it is quickly becoming an increasingly popular option for companies looking to raise capital suddenly 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 short introductory course, a business financing 101. 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.

Business Financing 101

Invoice factoring requires three things, a business that invoices its 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 can 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 relatively simple once a business understands the basics. Factoring allows companies to get money within days instead of waiting for the weeks or months it might take to obtain a bank loan. It will enable companies to raise capital without taking out a loan.

Businesses can 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

The Process is Simple

The factoring process is relatively 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 smoothly.

Fast Money

After a relationship with a factor has been established; a business can obtain monies in as little as 24-48 hours.

No Debt Required

Invoice factoring does not require the use of debt.

Upfront Cash

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

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.

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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