All You Need to Know About Invoice Factoring
As the owner of a small business, you must keep a supply of working capital to use for purchasing inventory, buying equipment, paying employees and more. Unfortunately, if your company relies on customers to pay invoices, you might find yourself tight on cash sometimes. Invoice factoring may be the answer you need.
A Brief Definition
Most of the time, a customer has between 30 and 90 days to pay an invoice, which leaves you twiddling your thumbs until they do so. Invoice factoring is a type of financing in which you sell your invoices to another company for a percentage of their worth. This allows you to gain capital quickly when you need it for your business. For example, if your customers currently owe you $50,000 and a factoring company charges a 10 percent factoring fee, it will purchase your invoices for $45,000. However, keep in mind that it will only advance a percentage of that, so you’ll receive most of the money right away and the last bit after your customers pay the factoring company.
Advantages of Factoring Invoices
Of course, the biggest advantage of selling your invoices is getting the capital you need almost immediately. It may also help your customers since you can provide longer repayment terms. Selling your invoices is also easier than receiving a loan approval. Factoring companies base their approval on the value of your invoices and usually aren’t worried about your overall credit. Finally, you don’t need to provide collateral since factoring is unsecured financing.
Disadvantages of Factoring Invoices
The biggest disadvantage of invoice factoring is the cost. In addition to being somewhat expensive in terms of the percentage the companies take, they may also have application fees, processing fees or other fees that you must pay. Another possible issue is creditworthiness. While your credit doesn’t need to be excellent, the invoicing company may require a certain credit standard from your customers. If they don’t measure up, you may not get financing. Finally, there’s no guarantee that your customers will pay their invoices, which could leave you on the hook to buy them back.
Invoice factoring is just like any other type of lending in that you should only take it on if you truly need the capital. If you do decide to contact a factoring company, verify its license and check reviews from former customers first to ensure you are choosing a solid company. Taking this bit of extra time could save you a lot of inconvenience and money in the future.