Factoring Invoices: An Excellent Financing Option for Small Businesses

Small businesses, especially those who have not been existence for very long, will often find it difficult to secure a loan.  Banks are often hesitant to lend money to businesses that don’t have a lot of income and assets.  They also want proof of the viability of a business, and thus require that most operations, especially small ones, are in business for a certain amount of time before they are willing to hand over any money.  Because of this, a small business often has few cash generating options when needs arise.  One option available, but often overlooked, is invoice factoring.  Invoice factoring is an excellent way for a small business to obtain cash.

Factoring invoices are advantageous for several reasons.  It allows a company to raise money without acquiring new debt.  While debt is sometimes necessary, most businesses would prefer to raise cash without borrowing money.  Debt is risky, and when it cannot be paid back, assets can be repossessed.  If the debt is large enough, it may even force a company out of business.

Factoring doesn’t pose the same problems.  Those invoices secure the money paid to the company selling their invoices.  The work often has already been done, and the business is only waiting to receive payment.

Factoring invoices is also an excellent option because it is a way for a small business to get money very quickly.  More often than not, when a company is in a cash crunch, they don’t have much time to figure things out.  Their employees have to be compensated, there are supplies to buy, and rent to be paid.  These things often can’t wait, at least not for very long.  Therefore, the time factor is critical.  A small business will need to secure funds as soon as possible.  Factoring allows them to do that.  The company’s first experience with a factor may require they wait 4-7 days to get paid.  However, from then on it is likely they will receive money in as little as 24 hours.

The factoring process is pretty simple, after all of the details have been arranged. A company will sell their invoices to a factor up to 90% of their value.  For example, a $100,000 invoice may sell for $90,000. The company can use this working capital however they wish to use it. After they have paid for the invoices, the factor will collect on the invoices.  The original terms of the invoices apply.  After they have collected them, the money is returned to the company they purchased them from, minus the factor’s fee.  It’s as simple as that.

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