How Can I Borrow Money Using My Invoices As Collateral?
A company can borrow money using their invoices as collateral. It is done everyday by businesses all over the world and is called factoring. Businesses in all industries sometimes have cash flow problems. Many times these are due to slow paying customers. Though incoming payments may be on the books, not actually having them on hand can make it very difficult for a company to resume operations.
Being cash poor or having cash flow problems can make it difficult for a company to purchase inventory, cover operational expenses or pay staff. If these problems are not solved and quickly, a business could experience major setbacks and could even go under. Factoring, or using ones’ invoices as collateral, is one available way to solve these problems.
Factoring involves selling one’s invoice for an advancement of cash. A company would sell them at a discount, say 80%, and get the cash value in this amount. The business that buys these invoices, called the factor, will then collect on the invoices. Once they have received payment in full, they will return the reserve (the amount over and above the initial purchase price) to the seller minus any pre-determined fees.
This process is beneficial for the seller because they have been able to get cash immediately. After the process has been initially set up and established, which may take about 7 days, a company can have their invoices sold in as little as 24 hours. The factoring company buys the invoices, up front so that the seller gets their money right away and does not have to wait for the normal collection process, which could take up to 90 days or more.
Factoring is also a great choice because it allows a business to receive money without having to actually qualify for a loan. Businesses without perfect credit can still get access to cash when they need it, even when they have had problems in the past. This can be a huge relief because it may enable a business to stay afloat or even grow without the help of traditional bank financing.
The company that purchases the invoices, the factor, also benefits. They will charge the seller fees for their services.
It is quite possible for a business to get immediate cash by using their invoices as collateral. It happens everyday, all over the world, giving businesses that may not qualify for traditional loans, an opportunity to grow and prosper. Instead, of relying on borrowed money, they are leveraging the hard work they have already put in to infuse cash into their businesses.