The Basics of Invoice Factoring
Making goods and providing services often means that you are waiting for customers to pay on invoices for the cash you need for supplies, bills and salaries. This can strain your cash flow and prevent you from making seasonal or time-sensitive purchases you need to grow or thrive. When your cash flow is tight because of outstanding invoices for goods or services already delivered to customers, you can turn to factoring or accounts receivables financing to get some needed slack. This process gives you an advance on qualifying invoices, so you have the cash you need for working capital while the customer still has time to pay.
What Are the Benefits?
Not only does financing your accounts receivables give you cash when you need it, that you are already owed, but it can free your company from the burden of collecting on those invoices. The fees associated are usually lower than the interest rate on a loan and the process has an easier application process. You can even apply online and get the advance within days. Since this is much faster than other financing options, accounts receivables can help you make time-sensitive deals or avoid late fees when working capital is low.
How Does It Work?
Factoring uses your invoices as collateral on an advance and the funds you receive will be a percentage of the total value. Once the accounts have been paid, you may receive the holdback minus a small fee or sometimes the factor only holds back the amount of their fee. Your customer will pay the factor so you will not have another bill to remember.
What Invoices Qualify?
Most of the time, factors will only accept invoices from other companies and not individuals. These companies will be checked for credit worthiness and the invoices you submit cannot be overdue. If your business routinely supplies large invoice orders to successful companies, then your accounts can be ideal for this financing option.
Accounts receivable financing or factoring is the process of using invoices as collateral on an advance. You can receive a percentage of the invoice total within a few days of your application being accepted and the advance is repaid when your customer pays the money owed to you for goods and services already provided. This can free up your cash flow to buy supplies for the next project, take advantage of sales or time-sensitive business deals and even pay the rent.