Invoice factoring is a useful tool for small businesses that are looking of ways to maintain a moving cash flow as well as a consistent resources. Business to business companies benefit from invoice factoring because it helps boost their respective cash flow according to their pending invoices. This allows you to earn immediate fund access instead of waiting for clients’ payments, which can take more than 90 days to release.
How Does It Work
Invoice factoring works by selling your receivable accounts in exchange of providing you with your working capital. This allows you to get funds immediately without the actual borrowing. The process allows you to use most of the funds that your client owes you immediately, thus keeping your business operation normal. Invoice factoring is great for businesses who deal with clients that are typically slow-paying or are in payment terms.
Factoring Fee or Factoring Rate: What Does It Mean?
A factoring company earns from invoice factoring by charging a small fee on your invoices. This is called the factoring fee or rate. It is generally based on a certain percentage of your advance. For instance, the company’s factoring rate is 3% for every $10,000, this means the factoring company takes $300 as a factoring fee. While the rates vary from one per cent to five per cent, this depends on certain criteria.
The fee is not really a big amount, given that you get to access the funds that may otherwise be unavailable for months. With invoice factoring, you can continuously invest, pay your employees, and buy equipment and materials. This is a useful service particularly for small-scale businesses, but large businesses can benefit from it, as well.
Overcoming Cash Flow Gaps
A small or medium-sized entrepreneur may face various hazards that can widen the gaps of cash flow. While there are alternative lending options that can save your cash flow from completely diminishing, most of these options are costly.
For example, you got a payday loan, which requires you to fund your checking account because DAILY payments will be charged from it. You’ll be charged additional fees in case payments are delayed or your checking account doesn’t have funds. Hence, you are at risk of higher loan payments not only because of high interest rates, but also due to additional fees.
Another way to acquire funds is to get a merchant cash advance. However, this is also pricey, and at the same time, risky. This type of loan charges you variable rates that depend on the projected sales of your company. In case you do not meet the projected sales, the lending company may end up charging you more than you earn. And on top of that is the high interest rate.
Invoice factoring, on the other hand, is the answer to these challenges. With this, you just sell your invoices to a factoring company, which will charge a small percentage in return. Most factoring company checks outthe credit worthiness of your invoiced customer and once approved, you get at least 70% of the amountof invoices you are selling.
Why Invoice Factoring is Ideal for Your Business
Get cash immediately
With invoice factoring, you get the needed cash immediately, saving you from most cash flow issues such as payroll pain, inadequate supplies, or mortgage payment. The ease of invoice factoring makes these responsibilities less stressful.
Makes growth opportunities possible
Invoice factoring enables you to expand company operations, develop new products, and hire additional staff without having money issues. Forget about the time when the unpaid invoices of your customers leave you hanging and slowing the progress of your business.
Receive cash without making a loan
While bank loans or credit lines can support your cash flow, applying for one is never easy and they take too long. In addition, loans can be costly at times. With invoice factoring, you get to use the cash whenever you need it. Moreover, it doesn’t reflect as debt on your balance sheet and won’t give a negative impact to your credit score.
With the benefits of invoice factoring to the business cash flow, it is not surprising that more and more businesses are considering this service.