How to finance your business through invoice factoring
What is invoice factoring?
Invoice factoring is a tool that provides quick financing to institutions with slow-paying clients and therefore suffers cash flow shortages.
How does it work?
Invoice factoring offers immediate working capital by financing your invoice to a creditworthy commercial client. You need a factoring company which intermediates your invoices. Once you invoice the client, the factoring company advances money to your business using the invoices as security.
The company sells the invoices to a factor which purchases them at a discount. The general rate is 70-90% of the full value of the invoices. The company is then offered money, which is usually given in cash.
After the factoring company collects on the invoices, money is returned minus a fee. Once the client pays in full on the regular schedule, the transactions between the factor and the company closes.
What if I need it urgently?
You can get this type of funding in a few days if all goes according to plan. A quote and a proposal can be obtained on the same day. For accuracy and caution, you need a week or two to process the invoice factoring.
Invoice factoring is faster than most financing solutions which makes it highly reliable.
What do I need?
The good thing about invoice factoring is that you do not need to provide additional collateral. It is, therefore, better than most bank financing. All you need are creditworthy commercial clients. You should also ensure that your company or business is run well.
The amounts owed by the clients should also be free of any lien.
Advantages of invoice factoring
Here are some of the pros
- It streamlines cash flow- Invoice factoring offers a business instant cash offering them a chance to continue with their business operations as they wait for clients to pay their invoices.
- Growth- Invoice factoring can fund a company’s growth thanks to the working capital it provides, which can be used for expansion.
- It is affordable- Invoice factoring attracts no interest rate as compared to other sources of financing.
- It does not require a lot of qualifications. You only need creditworthy customers. This makes it the best funding for small businesses which might not have built business credit scores.
Disadvantages
- Invoice factoring is only restricted to solving one specific problem, which in this case, is to address the cash flow problem.
- It is not as private since your customers will know due to the Notice of Assignment issued.
- The invoices must be verified with the customers.