How to Get Working Capital With Invoice Funding
For many businesses, generating enough working capital to keep things running can be a challenge. When the company invoices their clients, they may have to wait up to 90 days before they receive payment for goods or services they have already delivered. While this may be convenient for customers, it can put much stress on a business’s cash flow.
Companies are forced to wait before they receive money they have already earned. Meanwhile, business must carry on as usual. There are bills and employees to be paid and supplies to be purchased. These things must be handled even if their customers have not yet paid a business. For many companies, dealing with this can be a great challenge. For some, it may even cost them their business. Many rely on debt to infuse cash into their coffers so they can continue to operate, though this is not always necessary. One excellent alternative that many companies either do not know about or fail to utilize is invoice funding.
Invoice funding is rather simple. A company sells their invoices or receivables to a factor. This factor will purchase them at a discounted rate, generally between 70% – 90% of their full value. This money is paid in cash and can be used for whatever the business needs it for.
The factoring company then collects on the invoices, returning the money to the business they purchased them from, minus a fee. This allows the company who sold the invoices to generate the capital they need to operate or even grow their business without assuming a bank loan. While debt can be an effective way for a company to raise money, it is not always the best or safest.
Anytime a person takes out a loan; they put their business at risk if they are not able to pay it back. Debt can put a company under a tremendous amount of stress, because if they are not able to pay back what they owe, they may have to return property they purchased with debt or even be forced out of business.
Invoice funding leverages work that a company has already done. By selling their invoices, it is no longer necessary to take out a business loan. Business loans can be difficult to qualify for, and they are nearly impossible to obtain if a company has not been operating for very long, or if their credit is not very good. Invoice funding also tends to be much cheaper than a loan. Most factors charge between 1% and 3%. The final amount is dependent upon a number of things, mostly the creditworthiness of customers and the due date on the invoice. An invoice due in 15 days will be cheaper than one due in 60 days.