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Maintaining a healthy business requires paying attention to cash flow, which can be a challenge even if your business is successful. The delay between providing products or services and receiving payment for them often causes these difficulties.
Although your balance sheet might seem strong because of a high debtor balance and enough cash reserves, having a huge amount of money owed to you can impede business growth and even result in failure.
When you have a thriving business that is financially stable, you may want to consider getting a loan to handle any cash flow issues. Banks and other financial institutions are usually open to lending to businesses that have a track record of selling their products or services successfully. Nevertheless, obtaining a loan can be time-consuming, as it involves providing a lot of documentation and verifying your company’s status. This could cause you to miss out on potential sales if you don’t get the funds in time.
In what ways can invoice factoring be beneficial?
Invoice factoring can help your business by allowing you to sell your outstanding invoices to companies that specialize in purchasing these debts. This will allow you to continue providing credit terms to your customers while receiving immediate payment for your products or services.
How Does Invoice Factoring Work?
To implement invoice factoring, some preparation is required, but the process itself is fairly simple. Before beginning, the factoring company will evaluate the creditworthiness of your customers, and it could be helpful to speak with your customers beforehand.
To use an invoice factoring company, you must first reach an agreement with them. Then, you need to provide them with copies of the invoices that you want to factor. The invoice factoring company will confirm these invoices with your customers, and once they do, they will pay you a percentage of the invoice total immediately. The initial advance that you receive is determined by your contract with the factoring company and is usually between 80% and 90%.
When you work with a factoring company, they take ownership of your customer’s debt and your customer is responsible for paying the invoice to them. Once the debt is paid, the factoring company will give you the remaining balance after deducting their fee. This fee typically ranges from 1% to 2% of the total invoice value and is detailed in your contract based on your business and average invoice values.
What are the consequences if the customer fails to make payment?
When it comes to the possible failure to pay off the debt, who is responsible for the payment depends on the kind of contract you have with the factoring company. Recourse contracts are more prevalent and have lower fees. If you have a recourse contract, you are obligated to reimburse the factoring company for any unpaid invoices after a specific period. In contrast, non-recourse contracts have higher fees because the factoring company takes on the risk of handling unpaid invoices.
What are the benefits of using invoice factoring?
Invoice factoring has many advantages. By providing quick access to cash right after a sale, it enables better financial planning and liquidity. Moreover, it minimizes credit control expenses since the factoring company assumes the responsibility of collecting debts from your customers.
Quick Cash – One of the main reasons why people choose invoice factoring is because it offers quick access to cash, which helps maintain smooth business operations. Unlike invoice discounting, where you need to repay a loan, invoice factoring provides a cash advance.
There are legitimate reasons why a business owner would need to get access to the fast cash, such as:
- Paying employees
- Settling monthly bills
- Bringing in fresh inventory
- Expanding to a new location
- Helping manage overdrafts
Easy Loan Approval – If your business has limited collateral and a short financial history, getting a loan can be difficult. But with invoice factoring companies, your customers’ credit scores are more important than your own track record. Therefore, you can still apply even if you have a faulty or nonexistent financial history.
One of the main benefits of invoice factoring is that it is open to almost any business, regardless of their credit score or credit history. This is why it is a popular financing option, especially among small and new business owners.
Less Risky – Invoice factoring doesn’t require collateral, unlike traditional loans. This means you won’t have to worry about losing valuable assets if the customer doesn’t pay. If the customer doesn’t pay, most factoring companies will help you find a reasonable solution. However, the difference between factoring with recourse and factoring without recourse is important in this situation.
What are the disadvantages of invoice factoring?
It is important to consider the potential drawbacks before deciding if factoring is the best option for your business, especially if it is a large company.
Bad Apples – Although invoice factoring is a legitimate business practice, it has had a questionable history. In the past, some lenders used unclear language and unethical practices to exploit their clients. However, the industry has since adopted more transparent standards to prevent such situations from happening again.
It’s important to know that factoring companies vary, and some may attempt to exploit you with additional fees. Fees such as application fees, processing fees, credit check fees, and late payment fees can accumulate rapidly. Even if you are satisfied with the factoring rate you were provided, you should be cautious about extra expenses and conduct extensive research before agreeing to the terms. Always read the fine print carefully and ask questions beforehand.
Reduced Profits – The factoring company deducts a percentage from each invoice, usually ranging from 1-3%. While this may seem like a small amount, it can add up over time and impact your company’s monthly budget.
Customer Credit Scores – Even if you don’t have to worry about having good credit, a factoring company has to check if your customers have good credit before accepting the invoice. If their credit rating is not good enough, your request for invoice factoring may get rejected.
Invoice Factoring with Business Factors
Look no further for a reliable factoring company with enough reserves to solve your payroll problems. Business Factors & Finance was founded by 40-year-old factoring institutions and is a trusted name for working capital loans. We offer factoring options to businesses of all sizes and industries. So if you have cash flow issues, rest assured that we have a solution for you.
Call us at 800-672-3844 or send an online application to get started.
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