Fledgling businesses, start-up companies, and growing businesses often need to evaluate funding options when cash flow problems arise. As any experienced business person knows, consistent cash flow is one of the keys to a well-run business. Invoice factoring or accounts receivable factoring is an excellent way of helping businesses stay in control of their cash flow.
Large and established businesses often have cash on-hand or available financing to take advantage of growth opportunities or handle cash flow problems. However, small and young businesses don't have the luxury of relying on traditional financing. Fortunately, invoice factoring is an excellent source of financing for small businesses. In fact, accounts receivable factoring has been helping business for centuries.
What is Invoice Factoring?
A factoring company does 3 basic things:
- Buys your invoices and sends payment to you, the invoice amount less a reserve.
- Collects the receivables due from your customers.
- Remits the reserve to you, less charge-backs and fees.
Your customers can hold payments for 30 to 90 days which can eat up your cash quickly. Factoring companies advance you the funds up-front so you're not waiting. Invoice factoring is a straight-forward and practical way to get payment immediately for delivered goods or rendered services instead of waiting for the cash to arrive from your customers.
Invoice Factoring Improves Cash Flow
"Cash is King"... It's a common phrase in the business world and it's so very true! Cash gives a business staying power - real stability. It's not just money in the bank.
Good cash flow ensures a company will be viable for the long-term. Cash flow makes it possible for businesses to grow and sustain the ups and downs of sales volumes and operating expenses. Factoring companies facilitate the transition from being a shaky startup to a solid thriving business. Accounts receivable factoring has been around for centuries - it's helped millions of small businesses grow and become successful.
Reasons to Use Invoice Factoring
Obviously, instant cash flow is a huge benefit of invoice factoring, but there are other reasons to use factoring services for your business financing.
An alternative to bank financing
Small businesses and start-ups often don't meet the requirements for a bank loan or line of credit. Invoice factoring helps businesses that don't qualify for bank financing due to poor credit, lack of collateral, or limited financial history. Factoring also doesn't require an extremely detailed business plan.
Reduce back-office costs
Collecting money from customers requires personnel and time, which cost money. A factoring financing company performs this function when they invoice your customers. You can concentrate on growth, creativity, and new products while the accounts receivable factoring company does the leg-work in collecting payments.
Customer credit services
Most factoring companies use credit bureau information to check your customers' credit when setting up your account and factoring more invoices. They can check credit on your existing customers as well as new or potential customers. Credit services are help you avoid bad debt losses due to credit reasons.
A loan from a bank is a great way to build credit, but it also means the company is taking on debt. Working with business factoring companies is one of the best options for improving cash flow and funding start-up activities without going into debt. While debt isn't necessarily bad, sometimes it's helpful to avoid it.
Achieve business growth
One of the stumbling blocks that new businesses face is an inability to take advantage of growth opportunities. Invoice factoring companies provide the cash necessary to make purchases and expand alongside strong market trends. Loans take time to get, and sometimes it can be months before a company receives its funds. Factoring has a setup time of just a few days.
Choosing A Factoring Company
When searching for a factoring company, you need to consider these key factors:
Find a factoring company that has experience in your particular industry. General factoring companies provide factoring services for many industries. Construction, healthcare and freight and trucking industries require specialized factoring services.
Find factoring companies that offer the credit size (or credit facility) that fits your business's needs. Credit ranges fall into larger sizes ($3 million or more), normal sizes (up to $3 million) and small or micro-factoring sizes ($25,000 or less).
Factoring rates differ according to your sales volume, number of invoices and the credit-worthiness of your customers. Rates generally range from 2% on up to 6% of the invoice amount depending on your business.
Don't get locked into a multi-year contract. Getting out of a long-term contract can bring on hefty cancellation fees. Look for contract terms that are one year or less.
FactoringClub.com is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.