Get the Cash Flow You Need with Factoring
Every business owner needs tools to help their business succeed. Invoice factoring is a tool that can help keep your business growing while you wait for your invoices to come due. Here is an explanation of how it works and what types of businesses can use it.
How Factoring Works
Factoring provides cash flow in two phases. Before an invoice is paid, factoring companies issue a loan to your business for up to 80% of the invoice’s value. When the invoice comes due, your customers pay the factoring company directly. Then the factoring company remits the rest of the payment back to you, less their financing charges and transaction costs.
When you apply for invoice factoring, the factoring firm will determine your eligibility based on a variety of factors. If your transaction is approved, they will issue the terms of the proposed factoring arrangement and you can choose whether to proceed. Once you sign the factoring agreement, the factoring company makes its initial disbursement. This can take as little as two to three days.
The factoring company will notify your customers that you have assigned the invoice payments to the factoring company, and provide information on how they should pay their invoices as they come due. When the customer pays, the factoring company keeps the amount they loaned to you, along with interest payments and fees defined in your agreement. The balance is sent back to your business.
Interest rates for factoring range from 1.5-5% of your invoice amount, and charges are incurred monthly. Keep in mind that transaction and other service fees may also apply to your factoring agreement and read through your contract carefully to ensure that you avoid unpleasant surprises.
Is Your Business Eligible?
Not every business is a good fit for invoice factoring. Factoring can cover businesses that provide goods or services, but only business-to-business (B2B) or business-to-government (B2G) invoices are eligible for consideration. Furthermore, only invoices with a 90-day payment term or less qualify.
Factoring businesses do extensive research on your customers before offering financing secured by their invoices. Customers must exhibit reliable payment habits and a good credit score. Factoring firms also examine your business closely. Your business must generally have a good-to-high credit rating to be considered.
Factoring is often cheaper and more flexible than other forms of business financing. The proceeds of factoring can be used for any purpose, and businesses are not trapped in a long-term financing commitment. As part of a deliberate cash flow management program, factoring allows you to answer when opportunity knocks rather than missing chances while you wait for payments to roll in.