Why a Business Should Consider Invoice Financing
Businesses live and die with their cash-flow. Even when a business is doing well, problems with credit offered to customers can destroy a company's cash-flow. Those businesses that need timely payments in order to keep inventory stocked, pay for necessary services and make payroll can face disaster if customers don't make timely payments.
Financing by invoice factoring can get businesses cash as invoices are issued, rather than waiting. The factoring company makes a loan of up to 90 percent face-value of an invoice. They then collect payment from the customer when the invoice is due, completing the loan. The difference, less fees, is then passed to the borrowing company.
The benefits of factoring include timely payment of invoices, which enables more accurate cash-flow planning. The business can now be sure they can cover necessary costs as they arise.
A second benefit is customer follow-up and payment collections are taken care of by the factoring company. The time this saves is especially valuable for small businesses.
For those companies concerned with third-party payment collections, guidelines for communications can be given to the factoring company. However, it is still important to continue regular contact with customers to ensure quality of customer care.
Another similar form of invoice financing is discounting, which keeps control of the sales ledger in-house. This is more common for larger companies with capital requirements for growth. The higher sales of a larger company give them the ability to use invoice discounting to access a large infusion of cash at a low interest rate.
Invoice financing has the advantage of a fixed fee, with interest only charged on uncollected payments. Debts are repaid when the customers pay their bills. Because of this, a company's increased sales increases their borrowing ability through invoice financing.
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