Most small business owners are well aware of how important cash flow is for expansion and to meet obligations. When opportunities to obtain a conventional bank loan and credit are limited, many small company owners turn toinvoice factoring as an alternative form of financing. This process provides a much easier avenue to get much-needed cash without the scrutiny brought on through traditional lending institutions.
Understanding Accounts Receivable Financing
Invoice factoring involves the selling of outstanding receivables or invoices at a reduced rate to an established factoring or finance organization. The factoring business assumes all risk on the outstanding invoices and offers quick cash to the seller. The value amount placed on each account usually depends on the age of receivables. More current invoices typically pay more when compared to receivables that are several months old. Generally, an invoice three months or longer isn’t financed due to the higher risk.
Advantage of Factoring Invoices
One of the most obvious benefits to selling your outstanding invoices to a factoring enterprise is that it frees up valuable resources that allow you to concentrate on activities which are more productive for your business such as sales. It also frees up working capital that may be tied up in a large inventory. Also, selling off your account receivables doesn’t require a complicated business plan or complex tax strategies. It is a quick and simple form of cash that can help many small companies that may be experiencing cash flow problems.
Important Considerations
Before turning to an account receivables factoring service, each small business should carefully calculate the fees or other charges each company offers to ensure getting the best rates. If you plan to factor your invoices as a long-term solution to your business growth, it might be possible to negotiate a better deal. Because the factoring industry isn’t as highly regulated as banking, it’s important to spend the necessary time investigating each company you are thinking about using. Make certain they have an established reputation as a buyer of invoices.
When to Use Invoice Factoring
Many factoring enterprises are used as a continual source for account collections. This allows small businesses to avoid the time and expense used to collect on invoices. It is most helpful for companies that have a customer database of other businesses. Because the factor is in business to collect payment from your clients, the majority understands that maintaining a good relationship with them is imperative.
