Obtaining Funding Through Invoice Factoring
There are many routes that businesses take when it comes to financing. From using credit cards and asking friends and family for help to the more traditional option of applying for bank loans. Factoring (sometimes referred to as Accounts Receivable Financing) is one of the routes that many up-and-coming business are using. For small businesses that are in need of immediate capital but would rather not take out loans or can’t qualify for them, factoring can be a very helpful financing option. Factoring is not a loan and therefore is not a liability for the company. Instead factoring is the sale of an asset.
In factoring, the business is basically selling the invoice to the factoring service (the source that is funding the money) for a small fee. The factoring companies then own the rights to collect on that invoice from the customer. In turn, the business has use of their funds right away and sometimes, doesn’t even have to deal with collecting from customers because many factoring services handle that part, as well. The number of invoices a business factors is entirely up to them. Some business factor a portion of their invoices while others factor all of their invoices. The factoring service is generally not very concerned with the credit worthiness of the business. Instead, they focus more on the credit history of the customers who owe on the invoices. So, even if a business wasn’t able to qualify for a traditional bank loan, that doesn’t mean that they can’t qualify for factoring.
There are several benefits for businesses who choose to employ this funding option. For one, factoring enables businesses to take on more clients than they may be able to without this upfront money. It’s also a great opportunity for those businesses that don’t want to take on the risks (or paperwork) of loans but still need extra cash flow in order to fund their growth. Additionally, factoring helps solve the problem of slow-paying customers. Instead of waiting one to two months for payment on an invoice, businesses can have their money in one to two days. Clearly this is an attractive option for companies still in the early stages of growth.
All factoring companies are different so businesses should be sure to look into what each factor’s fees and terms are and then decide which company is the best fit for them. Factoring has been around in various forms for years and is a proven business tool for companies of all sizes.