Invoice factoring companies are there to help you with immediate funds if you are unable to get a bank loan. Usually, if you want to get financed by a bank, you will need to have documentation to prove you have been in business for at least two years and you have to show a clear profit as well. Banks also want to have some sort of security against any loan, meaning you would have to put up real estate, inventory, equipment or machinery as collateral.
Invoice Factoring Companies Are There to Help You
Going to an invoice factoring company instead means you have far fewer restrictions to deal with. Rather than putting up collateral, you sell your invoices to the company. This is known as factoring. This means that you don’t actually have any debt, so you don’t have to deal with monthly payments either. Furthermore, you get to decide what percentage of an invoice you want to factor and when, although most invoice factoring companies do have a cap of between 70% and 90% on any invoices. If you are a young company that is still growing, or if you have tax liens placed against you, or even if you have been declared bankrupt, invoice factoring could be a great solution for you. As such, almost any business could benefit from this type of financing.
How Invoice Factoring Companies Work
The system of invoice factoring is quite simple. Basically, your accounts receivable will be purchased at a discount, giving you an immediate lump sum to do with as you please. Basically, it means you accept a lower payment on an invoice in return for cash, so you don’t have to wait for your customer to make a payment to you, which can take as much as 45 days if they pay on time.
You need to deliver a product or service that allows you to generate a valid invoice first. An invoice factoring company will then purchase it and provide you with the money. When factoring invoices, you could get your hands on the funds you need within as little as 24 hours. This, in turn, allows you to pay your bills, your taxes or purchase more materials to complete other orders. Indeed, the majority of companies use this system to enable them to increase their work productivity. Most companies need to purchase materials to deliver their own products or services, and if they have outstanding invoices, they would be unable to do so without factoring their invoices.
Most commonly, factoring companies are willing to buy your invoice for 80% of the value. The remaining 20% will be issued to you after the invoice is paid, of which they will deduct a factoring fee. The fee varies, however, and depends on how credit worthy your customer is, what sort of terms and conditions you have, how large the invoice is and the volume of factoring. However, all of this will be made clear when you request for an invoice to be factored.
