Invoice Factoring Made Simple
Business financing, especially for small businesses, has become difficult to secure due to the recession. Only a few years ago, it was a borrowers market, virtually shopping around between banks for the best deal.
Currently, even established companies with excellent financials struggle to convince banks to lend credit. It doesn't seem likely that anything will change for at least the next few years either.
As a result, creative financing options have become more popular. One popular alternative to bank credit is invoice factoring. It's designed to smooth over problems with cash-flow for companies whose clients may take up to a month or two to make payment. Longer payment terms might be common for larger companies, but small and midsize businesses don't always have the excess cash or credit needed to make payroll, pay suppliers and pay for utilities in the meantime. Factoring invoices can bridge the gap between delivery and payment collection.
It's a fairly simple process. You leverage the value of your invoice to factoring company, who acts as intermediary. Once your product or service is rendered, the factoring company loans you money, using the money owed you on the invoice as collateral, as long as the company owing on the invoice is up to the factoring company's credit standards. They pay you a small discount, providing immediate funding for current expenditures.
Invoice factoring transactions generally take place in two steps. About 80% of the value is paid as the advance. Any fees are deducted from the other 20%, which is returned once your customer has paid the invoice in full.
One big advantage of invoice factoring is the ease with which it can be obtained. So long as invoiced clients have few liabilities against their assets, most small to medium sized businesses can receive short-term financing in this way. Invoice factoring is an excellent solution for businesses with cash-flow problems over the 30-60 days it may take to collect payment from clients.
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