Many small businesses offer customers delayed payments for goods and services. However, to remain prosperous, companies need to maintain strong cash flow. One solution to this dilemma is the financing method known as invoice factoring. Here is some information to help you decide whether this funding option is a good fit for your business.
The Basics of Invoice Factoring
Invoice factoring functions as an alternative to a business loan. Instead of borrowing money from a lender, you sell your unpaid accounts receivables to a factoring company in exchange for an advance on the value of the invoices. This allows you to meet immediate expenses such as employee salaries while you wait for your customers to pay their bills.
How Invoice Factoring Works
When a factoring company agrees to purchase your unpaid invoices, you typically receive an advance of about 85 percent of their value. After your customers have paid for the products or services they have obtained, you receive the balance of payment minus a fee for the factor. The factoring company takes over the responsibility of collection. In recourse factoring, your company is obliged to pay back the advance for the receivables or replace receivables with others of similar value if your clients don’t pay. In nonrecourse factoring, you don’t have to pay back the advance, but the transaction fees are higher.
Advantages of Invoice Factoring
Invoice Factoring is an option for businesses that are unable to obtain loans from traditional sources because they are too new or lack a sufficiently high credit score. Since invoice factoring is a purchase of your unpaid accounts receivables rather than a loan, you don’t need collateral to obtain this form of funding. It quickly fills in funding gaps when customers are late paying their bills, keeping your cash flow strong so that you can continue to run and grow your business.
For more advice on using invoice factoring to help finance your business, get in touch with Gulf to Atlantic Commercial Capital.