A familiar story of the credit crunch might go something like this: a small but growing business with about 3 years of experience and a steadily growing client base is looking to expand. Said business owner goes to his local bank to seek a loan in order to lease a larger space and take his business to the next level.
The banker asks the business owner to fill out a stack of paperwork, which involves, among other things, a credit check. The banker inquires about collateral telling the applicant $200K is needed to secure the business loan. The applicant replies that if he had that kind of money laying around, he wouldn’t be at the bank asking for a business loan in the first place.
And so goes the cyclical conundrum of traditional bank loans: You need money to get money, but how can you get the money you need to make money if you don’t have enough money to begin with? And in this weak economy where banks are lending less and less, this cycle has become even more hardened.
Enter the Invoice Factoring Solution
This rut in traditional bank lending for businesses is just one of the reasons the practice of factoring accounts receivables or invoice factoring has grown in recent years. That is, because it has become more difficult in this recession to secure a business loan from a bank, alternative lending sources such as account receivables factoring has become more popular.
Whereas banks require business owners to put down collateral, to have a spotless credit history, and be established for several years, invoice factoring companies are different. Invoice factoring services provide cash by purchasing your existing invoices outright giving you the cash you need almost immediately. The factoring company will charge you a percentage of the total dollar amount (usually between 2%-8%) for facilitating this transaction. The cost and terms of the receivable factoring agreement is detailed in an easy to understand contract so there are no surprise fees or hidden charges.
Secure Accounts Receivable Financing and Skip the Bank
So in essence, invoice factoring companies act as a third-party entity buying your invoices from your customers enabling you to have the cash right away. Your customers will then pay their invoices to the factoring company by their previously established due date. (This can be a blind or transparent process, depending on the terms of the agreement.) In the end, everyone gets paid, everyone wins. In this way, factoring companies are not lending institutions and the money you get from factoring receivables is not a traditional loan.