In a fluctuating economic climate, one of the simplest ways for businesses to obtain working capital is through, invoice factoring. Invoice factoring is a financial transaction through which a business sells its invoices to a factoring firm at a discount. In exchange, the firm provides immediate money with which to finance continued business. Here are all the essential details about invoice factoring.
What Exactly is Invoice Factoring and How Does it Work?
Invoice factoring or factoring invoice or accounts receivable financing is vital business financial tool. It allows businesses to capitalize their unpaid invoices and receivable to a factoring firm to enjoy immediate cash. Invoice factoring eliminates the 60 days waiting period. With factoring, businesses get paid for their invoices whereas the factoring firm waits to be paid by the customers.
The cost of invoice factoring is based on several factors which include: Credit worthiness of the business’s customers, number of factored customers and the projected dollar volume going through the company (usually the higher volumes are factored at lower rates). Other factors that may be considered are the financial profile on the part of the company, the average invoice amount and the customers’ average pay time. Based on these criteria, the factoring firm will calculate the fees that a business will pay each month.
What Happens if a Customer Fails to Pay?
Invoice factoring clients are usually protected by a reserve rate, an amount that equates too typically to 10 to 20 per cent of open invoices providing a ready supply of working capital. Reserve rates are determined by the credit worthiness of your customers, projected turn of receivables, and the dilution rates (disputes, returns, etc,).
Why Should Businesses Consider Using the Services of an Invoice Factoring Company?
Factoring invoices is of great benefit to those businesses that a have a consistent, reliable customer base. It is also essential for companies that have a lot of money tied up in invoices and have cash flow constraints. The following are some of the key benefits business can derive by hiring invoice factoring services.
By using factoring services, business can eliminate the 30 to 90 days period that customers take to pay their invoices, they will get the immediate cash they need to continue running the business. Hiring the services of a good invoice factoring firm, enables the business to get upfront revenue needed to prevent potential clients from going to the competitor. It can also serve to level out extremes in billing and collection cycles that often plague small and medium size businesses. The consistent and continuous cash flows facilitate steady growth.
Avoid Unnecessary Financial Hassles
Factoring invoices saves you from the hassles of borrowing money from the traditional institutions. The invoice factoring firms do not look for perfect credit history from their clients as the banks require. The most factor item for the factoring firm is to check the validity of the bills or invoices that are presented to them.
It’s a Feasible Financial Option
Factoring invoices is quite feasible as compared to banks and other financial institutions. You do not have to wait for a long time to get your money granted. The process is quick, and as soon as your invoices are checked and processed, the funds are transferred to your account with the shortest time possible. The commission that you pay is also very reasonable especially if you the services of a well established factoring firm. This does not happen when you take loan from the bank, as the interest amount would have to be paid until the loan is completely paid up.
Avoid the Credit Risk of the Customers
Another great benefit of using the services of an account receivable factoring firm is that the factoring company usually takes the credit risk for the customer. If the customers delays in clearing the invoices, the factoring firm follows it and sends it constant reminders to clear the unpaid the invoices. In addition, if the customer becomes insolvent and defaults in payment, the factoring company assumes the loss. Small businesses who cannot afford to assume this, for them factoring invoices is an essential business financing products
Invoice factoring offers a wide range of benefits to business that require immediate cash and want to keep their business running smoothly.
Here’s a neat video describing how it the process works for the typical small business,