Invoice factoring companies may be able to provide instant, short-term funds for companies that would be unable to acquire a bank loan. Financing from banks would need commercial borrowers to encompass minimum two years in business along with profit showing needs. Banks would favour the loans secured by substantial and tangible assets such as inventory, machinery, real estate and equipment. Factoring is a way firms obtain cash for their businesses.
Popular to contrary belief, working with factoring companies has been deemed less restrictive. In case of you selling your invoices, which are often known as factoring, you do not incur any debt. Therefore, there would be no monthly payments. In addition, you could control your cash flow by determining how much you should factor and when. Growing and young companies or those having tax liens or for that matter, even bankruptcy could qualify for your invoice factoring account needs. It would make factoring companies a practicable source of funding for several kinds of businesses.
How does it work?
Let us understand invoice factoring in an easy manner. Factoring companies would be able to purchase your receivable accounts or freight bills at a highly discounted rate. They would issue you lump sum payments. Essentially, the company would be able to sell its receivable accounts or invoices at a lower value for quick cash rather than waiting the usual thirty to forty-five days for the invoices to be paid.
After you have delivered the service or product and look forward to generate approved invoice, factoring companies would be able to provide your money in less than a day. Fundamentally, working with factoring company could help speed up cash flow. The flood of cash could better enable you to meet your financial obligations. For instance, you could make use of money for increasing your working capital, pay taxes or bills. You could also make use of the amount for paying upfront for supplies and equipments. It would also take advantage of early payment discounts offered to you by the vendors.
How much factoring companies pay
Usually, factoring companies would pay approximately 80% of the total invoice value upfront. Henceforth, they would issue the remaining value, which would be given after deducting a factoring fee. However, it would be done once they have received payment from your client. The factoring fee would be determined by a combination of your credit worthiness of the customer base, invoice number, size, the average terms and factoring volume.