If you like most business owners, you don’t know much about factoring invoices. Many businesses do not know about this method to get business credit lines, which can provide flexibility and cash to companies that might not be eligible for traditional loan opportunities.
How it works
The theory behind the process is quite simple. Usually, accounts receivable is between your company and your client. This process allows you to bridge the gap between the time of goods or services provided and when you actually accept payment. This is done by the introduction of third parties, known as factors. These third parties buy receivables from you and advance a certain percentage in exchange. Then, after your client pays it, the rest is released.
This benefits you because you can get the funds you need faster. You don’t need to wait, and you can claim all or most of your original payments. Third parties receive small administrative costs in exchange for their parts in the transaction. Your client can deal directly with third parties, but usually there is no problem with changing the entity that receives payment.
Benefits for the Company
There are several advantages for this type of financing. First, more feasibility rests on your clients’ credit feasibility than with your own company. This makes it a very good choice for new entities that seek startup capital or want to grow. It is also profitable if your credit history is limited, or if you only find it difficult to get financing on the market today.
Second, invoice factor can provide faster response times than many other options. For example, some companies can provide decisions in a week. After information on receivables is actually transferred, it is possible for your company to receive actual funds in less than 24 hours. This speed rarely looks at most markets.
In addition, the balance here benefits your business. In many situations, the burden of interest or costs can be intense. However, administrative costs in this case leave your company with a large amount of cash in hand compared to what you will receive if you will wait for the receivables. Furthermore, there are no types of sustainable interest expenses related to the account, which makes it profitable if you are embarrassed to accept long-term debt.
Finally, this process functions as a business loan line, easily adapting to your changing needs. You choose whether you want to sell your invoice or not, and if so, how much you want to use. This makes it a good way to adapt as a change in seasonal demands or new opportunities available.