Are you a business owner who wants to increase monthly cash
flow, working capitol, and improve your credit rating? Then
invoice factoring could be right for you.
Invoice factoring is the process by which businesses sell
their invoices to a third party, called a “factor.”
The factor buys the invoices for about 3 to 5 percent less
than the invoice is actually worth. If your business produces
any type of invoice, then your business can take advantage of invoice factoring.
Once the factor purchases the invoice, then the factor owns
it, and collects the debt from your client. As the business
owner, you get to decide which invoices to factor, based on
your customers’ credit and payment history with your
business.
Factoring your invoices means your cash flow does not suffer
while you wait for your customers to pay. The factor buys
the customers’ debt, improving your working capitol and
the credit rating of your business.
It works like this: You send an invoice to your customer.
Then you inform your invoice factoring company that you have
sent the invoice, and in what amount. Usually, that can be
done by e-mail, so it’s quick and easy.
The second step is the factor confirms the invoice with your
client. Usually, this is done in such a way that the customer
or client does not know that you have sold their invoice to
a third party. The factor will identify itself as a billing department or company, rather than an invoice factor, and
will simply call or send a letter to confirm the invoice.
Some invoice factoring companies are willing to keep the factoring
completely invisible to your customers. And after you develop
a history and good relationship with the factor, they will
usually stop confirming every single invoice.
Once the factor has confirmed the invoice, they pay your business
a percentage of the total amount of the invoice, usually around
70 to 85 percent. This is called the “advance rate,”
and it is one of the primary points to look at when selecting
a factoring company. When the factor collects the invoice
from your customer, you will get the rest of the money you
are owed.
Factoring benefits businesses that have poor credit history,
no credit history, or limited hard assets. Factoring also
helps businesses when they are just starting out, because
it can often take time to build up steady cash flow.
Additionally, invoice factoring allows you to increase working
capitol without taking liens against your other collateral,
so there is little risk to you.
As a business owner you know how frustrating it is when waiting
for your customers to pay. Even if your invoices are not past
due at all, it can still take weeks to collect the funds you
need to put back into your business immediately. Invoice factoring
can help your business grow and reduce your own stress level.
