Business owners often face the dilemma of maintaining steady cash flow while at the same time offering 30 to 60 day payment terms to their customers. One method of financing that is ideally suited to helping you handle this difficulty is invoice factoring. Here is some information about how it works so you can assess its suitability for your business.
Invoice Factoring Basics
Invoice factoring differs from traditional bank loans and lines of credit in that the factoring company purchases your unpaid accounts receivables. It then collects the amounts due from your customers. In recourse factoring, if your client doesn’t pay its bills in a timely manner, you are responsible to reimburse the factoring company and take back the unpaid invoice or offer a different invoice of the same value. In nonrecourse factoring, the factoring company assumes the risk for unpaid invoices but generally charges a higher fee.
How Invoice Factoring Works
After you have applied for invoice factoring, the factor has conducted due diligence on the invoiced customers, and your application has been approved, you sign a financing agreement. The factoring company then advances you about 85 percent of the amount of the accounts receivables. You can use these funds to stabilize your cash flow, pay your employees, obtain equipment, purchase inventory, or for any other business needs you have. When your customers pay their bills, you receive the other 15 percent minus a factoring fee.
Advantages of Invoice Factoring
Companies that are just starting up or are still working on establishing a strong credit score are approved more easily for factoring than for traditional bank loans, because the factoring company looks at the creditworthiness of the customers rather than the business. Invoice factoring is unsecured financing, which means you don’t need to put down any collateral. Unlike traditional loans, you receive the funds quickly so that you can improve your cash flow and grow your business.
For more advice on invoice factoring and other forms of small business financing, contact Bear River Financial.