Invoice Discounting: How to Secure A Business Loan Against Your Invoices

Invoice discounting is a great option for companies interested in securing a business loan with future, promised payments or invoices. This is a very good financing alternative for some companies. Those businesses that offer services or products for sale and bill their customers via invoices might benefit a great deal from invoice financing. It allows them to get paid upfront from those invoices and not wait 30 days or until they are due.

When a company makes a decision to use invoice discounting to raise capital, they will be essentially selling their invoices to a Factor.  A factoring firm will purchase them for 10% to 30% less then what they are worth. Once they take possession are the invoices, all of the company’s customers will then send their payments to them (the Factor). Once they receive them, they will return the balance of the invoices to the company that originally owned them. They may send the balance once all of the invoices have been received or as they come in. This will be determined prior to the collection process.  To prevent disruption and to avoid upsetting customers and thus the relationship between the company and its clients, the payment terms or the invoices do not change.

The Factor is paid a fee for their services. The exact amount will depend on a number of things, including when the invoices are due, the credit worthiness of a company’s clients and the experience and reputation of the Factor, amongst other things.  It is important for any company considering discounting invoices to take special care and determine what fees they will be charged and under what conditions.

The invoice discounting process, at least for the company selling the invoices, goes very fast. After they have established a relationship with a Factor, they can expect to see funds in only 1 to 3 days.  This is an incredibly short amount of time and is thus, perhaps a fantastic option for businesses that need money fast and have unpaid invoices. They can leverage them so that they can secure a much needed business loan.  The process is simple, easy to quality for (businesses only need customers with good credit) and is an effective way for companies to generate capital.

In today’s tough economic times, it has become more difficult then ever for companies to find reliable sources of capital outside of the sales that many are struggling to obtain. Bank loans are drying up. It has become tougher then ever to convince a bank to loan them money. For some businesses, this means that they have run out of options and are thus, forced to close. Invoice discounting or invoice financing, is an excellent way for companies to raise capital so that they are able to stay afloat and perhaps even for expansion.

 

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