Understanding the Ins and Outs of Invoice Factoring
Thanks to invoice factoring companies, small and newly started up businesses can access almost instant capital. This allows them to continue operating their business. Invoice factoring is very different from a loan, which is what makes it such an interest concept. Rather than borrowing money that has to be repaid with an interest rate, the business actually sells their invoice to the factoring company at a discounted rate. The rate varies depending on the factoring company, the financial standing of the business, the type of invoice, the creditor and more. Essentially, however, an invoice is usually purchased for between 98.8% and 65% of the actual value. The factoring company then pays that amount directly to the company, and they will then become responsible for collecting the money.
Why Choose Invoice Factoring
In most cases, businesses choose invoice factoring over loans because it is so much easier and quicker to get your hands on the funds. Furthermore, the credit worthiness of the business is irrelevant. Rather, the factoring company looks at the credit worthiness of the client. This means that, on paper, the company is not actually increasing their debt.
This system offers a number of clear advantages. Most notably, the business can continue to operate as there is no cash flow interruption. This can be very important, because businesses often have to invest before they are able to complete a next job, and they can only do so if an invoice gets paid. Another great advantage is the fact that the business is not liable for any non-payment. Once the factoring company purchases the invoice, it becomes theirs. So, if the client then decides not to pay, or has to go through a lengthy chasing procedure, this will not affect the business in any way.
Clearly, it is very beneficial for a business to be able to access money without having to plunge into debt. Yes, the cost of using a factoring company can be quite high, particularly for the first few invoices, when the percentage paid as a fee may be slightly higher. On the other hand, there is no need to worry about making monthly repayments and there is no debt in the name of the business. This system is far more beneficial than those offered by capital venture lenders of angel investors. Once the funds have been received, the business can spend them anyway they can, as they have simply been paid for a product, being the invoice in this case. The debt continues to exist until the invoice is fully paid by the creditor, but it is a debt that then belongs to the factoring company.
Clearly, factoring is a great option. It ensures small businesses are able to continue with their operations and that they donâ€™t have to turn customers away because they are unable to fulfill new orders. Meanwhile, the factoring company is able to earn their money, as they purchase the invoice for slightly less than its actual value. A win-win situation.