Technically speaking, invoice factoring isn’t a sort of loan. But here you sell off your invoice at a slashed off rate to an invoice factoring company in lieu of lump sum cash. Once you seek help of FactoringClub factoring companies
, it owns your invoice and finally gets remuneration after the cash is collected from different customers. This typically may take a month or maximum three months. Invoice factoring – What is it actually?
When a business sells off its accounts receivable to a pro factoring company to free up immediate cash; mostly to secure working capital and help meet incurring expenses, expand sales or cover payroll, this transaction is called invoice factoring. It allows you to turn unpaid invoices into cash. The clients request generous terms which implies that the invoices should be outstanding for at least 30, 60 or 90 days before the arrival of payments. In the meantime, without getting the cash you can pass on opportunities to get back on your fallen business payments like payroll or even expand your business.
Amidst this entire transaction, there are only three parties involved, the company which issued the invoice, the customer who owes payments on it and the financing company which offers the cash in lieu of the invoice.The varied benefits you’ll reap from invoice factoring
When you opt for invoice factoring, you actually exercise control over your cash flow. You are also developing a relationship with your factor which can assist you in more ways than one. Here are some benefits of invoice business factoring:
When is invoice factoring not good for your business?
- Background and credit verification: It is indeed crucial to work with trustworthy customers to be able to build a solid payment history and turn sales into increasing revenues. But background checks and credit verification are tough to run and can eat away a big part of your working capital. The invoice factoring company you are working with will offer such checks at no cost and you can be confident about the quality of your customers.
- Credit repair and credit building: You may qualify for working with one of the best invoice factoring program even when your business credit is less than perfect. When you factor your open invoices, you not only cover the daily operating costs, but also pay down any current debt to build your credit rating.
- Opportunities to save money: Giving you the best rates isn’t the only way in which a factoring company can help you save money. They may even negotiate early-pay discounts or payment incentives with your suppliers. Depending on the amount that you will factor, you can also qualify for a good volume discount which can even reduce your rates further.
Remember that invoice factoring won’t be the right option for all situations. Here are three reasons when this might not be the best choice to fit your business.1. Your business requires more funding
If you’re planning a noteworthy expansion or purchasing equipment, your invoices won’t be able to obtain your adequate funding. You may then try SBA loans
, equipment financing or marketplace loans.2. Your business requires extended repayment period
Invoice factoring is short term financing. For reasons which could benefit from extended repayment period, you may have to look at alternatives.3. Your business doesn’t invoice customers
In this case, you would opt for conventional loans. Lending will be based on more traditional requirements like annual revenue, credit score and profitability.
Unlike a conventional loan, invoice factoring will never add more debt to your balance sheet; rather it works in an opposite way. Factoring will give you that extra cash which you would need to pay off old debts. You don’t require paying any money back or any added interest.