Being in a situation where you are short on cash happens if you own a business. This is unfortunate, but thanks to invoice factoring, you are able to get over these periods of being strapped for cash with great ease. Basically, the process means that you sell your invoices to a factoring company, who will then collect the total debt for you.
Understanding Invoice Factoring
Basically, through invoice factoring services, any unpaid invoices can be paid out. This is an effective and easy method to help you during times of financial difficulty. However, you do have to understand that it is only suitable for those businesses that simply do not have the working capital to survive and grow without this. Naturally, there are also other options out there like credit cards and loans, but these are often expensive, take long to organise and may not be available to you.
The Criteria that Determine whether You Can Use Invoice Factoring
One of the biggest benefits of choosing invoice factoring is that it is irrelevant to the credit history of your company. Instead, it depends on how credit-worthy your customers are. Basically, when factoring invoices, the company will look at how well your creditors have paid in the past to determine whether or not it is likely that they will pay the outstanding invoices. If they have good stability and a good payment record, you will be more likely to receive money towards that invoice.
If your customers meet the necessary qualifications, your invoices will then be scrutinised. There should not be a preliminary lien on the invoice, which means all the money on it is actually yours. This way, you guarantee that the company that buys your invoice is actually entitle to do so.
Who Would Use an Invoice Factoring Company?
Any company that generates invoices could turn to an invoice factoring company for help. However, you do have to determine whether this is a good solution to your problems. Generally, if money is owed to you and you need it straight away, it could be a good solution. Similarly, if the billing cycle is very long and you are not able to fulfil other orders because you are waiting for previous ones to be paid, you could also consider it.
The system is designed to allow you to access money quick. You have a virtually unlimited pot of money waiting for you that does not create any kind of liability. Furthermore, you are not taking out a loan, which means you won’t have monthly payments or debts against your name. There is no long-term contract either, which means that it is very flexible. It also means you could offer your customers a credit facility, so long as you know that they will pay their bills at the end of the day.
How Does it Work?
Basically, you sell any outstanding invoice to a factoring company. This means that you no longer have to wait 30 days for payment to be received (presuming your customer will pay up). Instead, you will receive your payment within 24 hours and you could get as much as 90% of the total value (although 70% is more common).