Invoice Factoring: Your Path to Smart Business Financing
Invoice factoring is a fantastic way for small businesses to get the working capital they need to cover payroll, pay for advertising, fulfill orders and to remain profitable. Many businesses will eventually face tough times when their cash flow is limited. Without the ability to raise capital, a business will find itself in a perilous position. Not only might they be unable to cover their fixed expenses but they may find it difficult to expand and grow their business. Expansion takes money and without it, it becomes impossible to go forward.
Up until 2008, when a business needed cash they would seek out a bank loan. While most companies with good credit and a few years under their belt, could find some bank to loan them money, today it is much tougher. Small businesses with the aforementioned qualifications are finding it very difficult to get a loan. As a result, many are being required to seek out alternative sources to raise money or shut their doors. Invoice factoring is one alternative that has proven to be quite effective for many businesses.
Invoice factoring is an excellent small business financing option that works very simply. A company, called a Factor, will purchase another business’ outstanding invoices at a discounted rate. An example of this would be a Factor purchasing Company B’s outstanding invoices for $90,000 when they are worth $100,000. This money is given to the business right away and can be used for whatever purposes they see fit. They may choose to pay personnel, cover their fixed expenses or even buy advertising to grow their business.
The factoring company will then go about collecting the money owed on the invoices. They will adhere to all previously arranged payment schedules, nothing changes in this regard. If it is necessary, they may continue to write the invoice holder or even call, if they have been late on their payments. After the Factor receives all monies (or as they come in) they will return them to the company they originally purchased the invoices from, minus the money already paid for the invoices and fees. The amount of money a Factor charges will differ. Their experience, standing in industry and the terms of the agreement will all influence the amount of money they charge.
Invoice factoring is an excellent small business financing option. It allows companies to raise capital extremely fast, sometimes within 24 hours, providing them with the cash they need to successfully run their business. In today’s tough economic times, it is harder then ever for companies to generate capital. Many businesses are seeing their cash stores dried up and invoice factoring is a great way for them to replenish their working capital.