Finding ways to fund your business is one of the most important aspects of running a business. Traditionally, business owners have gone to the bank to take out a loan or line of credit whenever they needed additional funding to start their business, expand their business, or make it through a slow month. As an alternative to a business loan, it’s possible to work with invoice factoring companies to secure money more easily–and with less risk to your business! This flexible source of funding is one of the most effective and creative funding solutions available.
What Is Invoice Factoring?
Invoice factoring services are primarily available for B2B (business to business) companies. If your customers have good credit, you can sell your invoices (accounts receivable) to a factoring company at a discount. The factor will then collect the full payment amount from your customers. For example, suppose the factor purchases your invoices for 90% of their face amount. Once they have collected all of your customer’s outstanding payments, they will return the remaining 10% minus factoring fee. Thus, you’ll get immediate funding, and your customers will pay the factoring company. The basic process can be beneficial to businesses in various industries that struggle with cash flow problems or periods of insolvency.
A factoring process gives you access to immediate short-term cash without the short- or long-term debt. You are also able to avoid diluting your equity by giving an ownership stake to investors.
Benefits of Factoring Companies
Using factoring companies has many benefits compared to traditional bank loans:
- It’s much easier to get approved. This is especially true for new businesses or businesses with bad credit. The factoring company mainly cares about your customers’ credit, not yours. Factoring is beneficial for businesses whose financial needs grow faster than banks’ willingness to lend money or don’t fit traditional lending requirements.
- You can avoid paperwork. When securing a commercial bank loan, you have to provide extensive documentation and proof that you will be able to repay the loan. Factoring companies, on the other hand, spend very little time scrutinizing your business. They simply determine if your customers are credit worthy and that your invoicing procedures are accurate.
- You’ll receive your financing faster. With invoice factoring, after a quick and easy setup, you can get your first funding within a few days. Also, the best factoring companies even offer same day funding! It may take weeks or months if you go through a bank.
- You’ll have more flexibility. For example, some banks limit what you can do with the cash they lend you, but the money you receive from invoice factoring is yours to spend as you see fit. Also, the best factoring companies let you avoid long-term contracts in addition to letting you get the money you need when you need it.
- You’ll avoid high debt. Once a factoring company buys your invoices, the transaction is complete. This is because invoice factoring is not a loan and will not show up as debt on your books. This helps you look good for banks and other creditors.
Who Should Use Invoice Factoring
Factoring is a well established industry in the United States, albeit not well understood by small businesses. Many of them work with big and small businesses alike, making it easy for you to get the money you need no matter what type of business you run. There are only a few requirements to qualify for invoice factoring:
- You must have customers with acceptable credit ratings.
- The invoices you sell typically must be due within 90 days.
- While your credit or that of your business may not prevent you from receiving consideration, interference from third party lien holders (like the IRS) may present a challenge. Still, even with these issues, factoring companies may still be able to help you, so it’s best to disclose those issues to your factoring company upfront and avoid bank loans.
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