Even profitable businesses encounter problems with cash-flow. if your business is in need of increased liquidity, especially if it is necessary to meet financial obligations, one solution could be invoice factoring. Continue reading to learn about how this financial options can benefit small businesses.
How Factoring Works
When goods are sold between businesses invoices are created to determine how much money is owed for the merchandise. In many transactions, businesses will have 30 to 90 days to repay these invoices. While large sales are great for business, it could mean that a smaller company will need increased access to liquidity to fill the order, to pay their employees, or to maintain business operations. Factoring companies purchase invoices. In return for a factoring fee, which is often a percentage of the total of the invoice, the factoring company will advance the balance of the invoice to the company. The business that purchased the merchandise will then repay the factoring company.
Traditional loans typically require collateral to secure financing, a high credit rate, and a significant amount of paperwork and time on the part of the business applying for the loan. Factoring is a way to gain access to money in a short amount of time. The credit rate used to determine the worthiness of the loan is the credit rate company to whom the invoice was issued, so businesses that are newly established or that have lower credit scores can still access this financing option.
Small Business Benefits
Many benefits are experienced by small businesses who choose to use invoice factoring. Businesses that have very little collateral, businesses that were recently established and do not have a long-standing operating history, or businesses that have poor personal credit will be able to access this financing method. With factoring you can offer your loyal customers better payment terms without damaging your ability to access money. The nearly immediate access to working capital helps businesses eliminate funding gaps that are caused by outstanding transactions and invoices.
Make Factoring Work for You
Despite the many benefits of factoring, there are some things businesses should be aware of to assure that this financing option works in their favor. It is very important that you research a factoring company well before engaging in any transactions with them. Beware of hidden fees, like application fees or overdue payment fees. Because your customers will be engaging with the factoring company make sure they will treat your clients ethically and fairly.
Invoice factoring is an excellent way to gain liquidity quickly and efficiently. speak with a financial advisor to find factoring options that will work for your business.