Can you use Invoice Factoring to Finance Your Business?
Every business owner knows the challenges of maintaining business cash flow. This is especially true when your customers/clients pay for goods and services in 30, 60, or 90 days. Invoice factoring offers your business the ability to turn outstanding invoices into cash. Invoice factoring is typically a solution to short-term cash flow issues. Without cash, you're passing on opportunities to expand your business or falling behind on important expenses, like payroll, inventory, and etc.
How Invoice Factoring Works
The invoice that is factored represents your customer's promise to pay for all goods and services you rendered to them. When you submit an invoice to a factor a few things will happen. First, the factoring company will determine if you meet their eligibility criteria to receive financing. They will also perform due diligence on the customers you are invoicing to see if they are good credit risks.
This is the stage where the factoring company gives you an initial advance called an advance rate. Typically this advance rate varies from 70-95% of the value of the invoice. The simpler application process provides faster funding and high approval rates compared to the bank.
Fast Cash: Invoice factoring can provide immediate working capital to help cover business expenses.
Easy approval: For companies that can not get funds from traditional sources, such as a traditional bank. In most cases, factoring companies only really care about the value of the invoices to factor and the creditworthiness of your customers.
Invoice Value: $20,000
Fee ( 3%): 600
Advance Rate (85% After Fees): 17,000
Total Received: 19,400
The factoring fee, also known as the discount rate, can run from .7% to 5% depending on the invoice amount, sales volume, and customer's creditworthiness.
Invoice factoring/financing is an affordable and often easy way to meet your everyday business expenses. If you have large receivable balances that you are still waiting to get paid on, then factoring might be right for you.
If you would like to learn more on how factoring works or are interested in getting set up with a factoring program feel free to contact me: firstname.lastname@example.org or 646-768-9716