Loading ...
If you own a business and want financing, then you are probably considering getting a loan. However, there are other options. Invoice factoring is something you should definitely consider.
You may or may not have heard about it, but this is option is becoming more and more popular. It has actually been around for some 4,000 years, although it has recently seen a surge in popularity. This is not an option in terms of getting a company up and running-it is more viable for firms that already are thriving.
The reason is, you need some receivables to get money from this strategy. The way factoring works is simple-the invoice company will pay you for your receivable (i.e. invoice). Many businesses do not get paid immediately, because they offer some sort of financing to customers. This is particularly true for firms that offer expensive products, and therefore their clients do not want to pay for everything upfront.
That is where factoring comes in.
With this method, another company actually buys the invoice you create for the customer, thus acquiring the right to it.
They generally buy it for 96-99% of what the invoice is worth, and they keep the rest for the fee. In most instances, they will give you 85-90% of the money upfront, and will keep the rest as a security. Once they have been paid by the customer, they will then release the rest of the funds (minus the factoring fee, of course).
But the percentage of the invoice they will give you varies.
The elements that determine how much they will pay you are the customers credit score, as well as how old the invoice is. The newer the invoice, the better. That is why you want to only do business with customers with a sound financial history, as well as sell the invoice immediately after creating it.
The difference between factoring and a loan
The main variation is that here the firm is buying the receivable from you. Therefore, there are actually 3 parties involved-you, the customer, and the factoring company. With a loan, it is just you and the company.
Factoring is easier to obtain than a loan, simply because it is not based on your credit score. Instead, it is based on your customers score. Therefore, even if your credit is bad, they will do business with you as long as your customers financial history is solid. For this reason, getting factoring is easier than getting a loan.
But it is not a get out of jail free card.
Do not just start selling every invoice you create without at least sitting down and making sure you have the money. After all, factoring fees can eat into your profit margins to the point where it is not worth selling the invoice in the first place. Therefore, figure this out beforehand.
Also, do not rely only on factoring.
There are other things you can do to improve cash flow besides this strategy. For instance, cutting down on unnecessary expenses, improving your marketing efforts, and making good hiring decisions are all important. The bottom line is, factoring could play a role in your overall strategy to improve cash flow.
