Small businesses thrive in many ways. One of these is by selling wholesale products in exchange for a reasonable payment period. This can range from 30 days to 90 days. The long term makes your business attractive to customers who like to earn a profit and improve their cash flow while repaying their debt. The problem is, what happens if you need the money now? You don’t have the time to wait for at least a month! An option you can choose is invoice factoring, but what is it and what is an invoice factoring company?
Here’s How Invoice Factoring Works
The term “invoice factoring” may sound complicated, but it’s not. It is a kind of short-term financing where you offer your accounts receivables in exchange for cash. Accounts receivables, also known as A/Rs, are the debts you will collect from your customers at a later time. Every time they purchase from you, you issue invoices, which will then serve as proof of the A/Rs.
The principle is quite similar to applying a secured loan. Before the lender will approve your loan–say, a mortgage–you need to provide collateral such as a car title or home. In case you cannot pay, the lender can repossess such property to recoup the loss.
What is an invoice factoring company? It is a business solution that accepts your invoice and gives you cash. It earns by charging you with factoring fees.
It works like this: you give your 90-day invoices to the factoring company. The company then pays at least 80 percent of the total worth of the invoices. After your customers paid you, you can get the remaining percentage less the factoring fees.
How much is the factoring fee? It depends among factoring companies, but usually it can be as high as 5 percent.
Why Is It Attractive?
Many small businesses prefer to proceed with invoice factoring than to apply for enterprise loans by banks for a variety of reasons.
One, the process is simple. All you need to do is to submit the requirements, wait for the approval, and receive your funding in as short as one day. You also don’t create business debt, since you have to pay for the fees in the end.
Second, you have more flexibility on the amount you can borrow. With factoring companies, you can already apply for at least $10,000. Business loans, on the other hand, may have a minimal take-out of $50,000 or more.
Third, interest rates or, in this case, fees can be significantly cheaper than those of business loans. For example, with factoring, you pay only 5 percent. Loans, meanwhile, will cost you at least 6.25 percent.
What is a factoring company? It is an organization that offer you the financial support you need when you are in dire straits and you need capital right away. Although it is short term, it can be enough to keep your business afloat until your customers start paying their invoices.
Do you need help with your tight cash flow? If yes, let our experts at FactoringCompany.net tell you what is an invoice factoring company and how it can help you get quick funding.