Business factoring is an appropriate alternative for startups and small businesses. The greatest challenge for small businesses is securing capital to fuel growth. Many business owners approach lending institutions and borrow from friends and family, but few know about invoice factoring.
Invoice factoring is a financing option available for small business owners. They can explore this channel to boost their capital and protect existing revenue. Read on to learn more about invoice factoring and how you can use it in your business today.
What is invoice factoring?
Invoice factoring is a business funding method. It thrives on awarding payment on your open invoices. Invoice factoring works best for businesses transacting with other firms on credit terms.
Once your firm sells goods or services to another business, an intermediary business invoice factoring company pays you immediately for the amount owing. Therefore, your client will not pay you; instead, he will pay the invoice factoring company on or before the credit terms expire.
Invoice factoring is also known as debt factoring or accounts receivable factoring.
Steps for invoice factoring
● Step 1
The selling business delivers goods to the receiving or purchasing company. The recipient takes the goods or services on credit but sends an invoice to a business invoice factoring company.
● Step 2
The business invoice factoring company advances the selling company on the value of the invoice provided by the receiving business. The invoice factoring company pays the selling business within hours of receiving the invoice.
● Step 3
The invoice factoring company receives payment from the receiving company for goods and services received. The customer should pay on or before the date stated on the invoice.
● Step 4
The invoice factoring company sends the balance for goods or services rendered to the selling company. However, the amount received is less than a small service fee.
When should you call an invoice factoring company?
An invoice factoring company is an ideal financing option if you have many outstanding invoices, causing a cash flow crunch. Invoice factoring is critical when you need immediate cash solutions to:
- Sort short-term business expenses
- Repay a pending loan installment
- Leverage a seasonal business opportunity
- Bridge a cash flow crisis in the business
Benefits of business invoice factoring
1. Provides reliable cash flow
Business invoice factoring is a critical alternative for capital financing in small businesses. It helps in ensuring there’s a steady cash flow in a company. The availability of liquid cash means tone can increase stock and make more sales for better revenue and profit.
No one business can boast of having constant capital flow throughout its existence. It is common for companies to encounter ups and downs while running their business. One can get a business opportunity that requires immediate cash to seize a chance, but all the money is tied up in receivables that take time to mature.
Business owners should take advantage of such a business opportunity despite their lack of cash. A business invoice factoring company can sort you out in hours and enable you to do business while they wait for payment.
2. Enhance the survival of a business
Your business thrives when there’s sufficient cash to keep transactions running. Poor cash flow can hurt a business and cause you to lose opportunities. Business invoice factoring can help your business grow and become more stable.
3. Sorts short-term financial needs
Business invoice factoring is a healthier, better financing option than securing a bank loan. Invoice factoring can help you access cash to handle short-term business needs. Securing a bank loan can be a hassle because the process is legalistic and expensive. The invoice factoring company will charge a minimal fee, while a bank loan attracts substantial interest on the advanced amount.
4. Helps to reduce business overhead
Business invoice factoring is less expensive than securing loan services from lending institutions. Requesting your finance department to chase down invoices and unpaid debts can be demoralizing. Invoice factoring also reduces the hassles associated with granting obligations to customers. Dealing with invoice factoring also transfers the responsibility of ensuring your client pays on time.
Business invoice factoring is a financing option for businesses with few customers. It involves a third party, the invoice factoring company, that advances you some money on the strength of the invoices you have from your clients.