The Basics of Business Invoice Factoring

by | Feb 13, 2013 | Finance & Insurance

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One of the more difficult aspects of running a small to medium-sized business is maintaining an adequate level of cash flow. The process of invoice factoring enables many companies to stay profitable and expand. Enterprises must maintain a certain cash level at all times. For businesses that have an established customer base and a stack of outstanding invoices, selling off this debt allows them to obtain immediate revenue. The factoring company buys the invoices at a discount and provides advanced payment to the seller.

Creative Financing for Small Business
The majority of factoring payments are done in installments. The seller receives an advance on the initial order from the financing company. They will then receive a second installment – frequently known as a rebate – after the client has paid the invoice. The advance payment is a percentage of the gross invoice value and can differ depending on several factors. With this type of creative financing, the business enterprise is able to receive immediate payment as opposed to waiting for payment from each customer.

Cost of Factoring Invoices
The cost of using an invoice factoring service depends on several key components. One of the most important is the credit level of the customer base along with the length of time invoices are due. Another consideration would be the monthly invoice factored volume. The client also pays a small transaction fee every time an invoice is processed. For many growing companies, factoring their invoices enables them to keep pace with new orders coming in.

Convenient and Safe
Factoring invoices is much different than a traditional bank loan. The majority of lending institutions will not provide loans based on account receivables such as invoices. Their focus is aimed at the amount of credit the business has and their past loan history. Conversely, a factoring organization is only concerned with the volume of your customer base and how much is owed to your business. It is a reliable way of procuring cash without incurring additional debt.

Get Cash Immediately
Businesses that have a lot of their capital tied up in outstanding unpaid invoices should carefully consider using a factoring service. Waiting several months or longer for clients to pay invoices is a common occurrence with most companies. However, for a growing enterprise this waiting period can have a number of negative consequences. It often becomes more difficult to meet payroll obligations and to pay vendors and suppliers. Factoring invoices provides the ability to concentrate on new opportunities without having cash flow concerns.

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