Running a business successfully often requires more than one-time investments in it. When businesses fall short on funds, they often apply for a business loan at higher interest rates. But, this interest can be saved if you know how to obtain funds from invoice factoring- also known as accounts receivable factoring or invoice funding.
In order to obtain funds from invoice factoring, a business must have customers that typically pay on time and have outstanding invoices. A business can easily get paid for its consumer’s invoices from factoring companies provided they are unpaid. More and more businesses are using this technique to make more funds for their organisation.
But, what is invoice factoring and how does it work? Well, let’s have a look at some points to understand it better.
What Is Invoice Factoring?
First of all, let’s get it straight- invoice factoring is not a loan. It is basically a type of financing that permits businesses to receive cash on their customer’s invoices before they’re paid. A business has to sell its invoices to a factoring company at a discounted price in exchange for a small amount of cash. Once you have handed over the invoices to the factoring company, they own it and will get paid when your customers will pay for their pending bills; usually it takes around 30 to 90 days.
For example, let’s consider that you’re a running a hardware store and selling goods to another business worth an invoice of £10,000. The customer asks for a period of 30 days to pay off the invoice. But, you have to pay your employees in the coming week and are short on cash. So, what are the possible options available for you?
Well, your go-to option will surely be a bank to get a loan, but let us tell you getting a loan isn’t a cakewalk. There are many processes involved in it and may be it will take you several months to get your loan approved. So, this is when you go to an invoice factoring company to sell your customer invoices. The company agrees to buy the invoices at a price of £9,700. It is quite obvious that you have to offer a discount on invoices if you wish to receive cash immediately. The invoice factoring company will then pay you 85% of the invoice amount immediately and the remaining balance will be paid when the customer clears off the invoice.
The discount on invoices can go from 1% to 5% depending on the amount, sales volume and even on your customer’s creditworthiness.
Why Invoice Factoring Is A Great Option For Building Funds?
There are many reasons that make factoring invoices a better option for building funds than taking a loan from a bank. Take a look at these points to get a clear understanding of it.
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Immediate Cash:
The best thing about factoring invoices is that you can get cash quickly in exchange for your pending invoices. It can provide immediate funds to recover a funding gap that is often caused by slow-paying customers. You can receive up to 90% of outstanding invoices in less than 7 days. Not to mention, if you already have a better relation with a factoring company, then this time period can be reduced up to 2 days.
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It’s Not A Loan:
Factoring invoice is not like a loan, which means you don’t have to go knocking on the bank’s doors again and again. To top it off, you don’t have to pay any interest for it. Invoice factoring is completely based on the purchase of your pending invoices at a discounted price. You will be able to acquire cash without taking on any additional debt.
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Flexible Terms
To get a loan amount from a bank, firstly you have to prove that you’re good at credit risk. Even if your loan is approved, it will take at least 1 month to clear your loan amount. But, a company doesn’t need to provide any such information on invoice factoring. The terms of factoring are flexible and involve no contracts at all. Factoring companies only care about the value of invoices and customer’s creditworthiness. However, they can ask you for your background information.
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You Don’t Have To Pay Back Anything
Like we said before, invoice factoring is not a loan, so you need not repay any money. Also, there will be no interest or principal to be made on the availed amount. Factoring invoices is considered as an unsecured financing and doesn’t require any collateral-an asset that the factoring company can seize if they don’t get paid from the customers.
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No Rules On Investing The Money
It’s a known fact that business loans are often used for a specific purpose, but there are no such rules on invoice factoring. Once you get the funds for your invoices from the factoring company, it’s up to you how you want to spend it. You will be in complete control of your money and can spend it however and wherever you want to.
For example, you can use it to pay your taxes, meet payroll, pay bills, or even to renovate your office. However, many companies use these funds to negotiate bulk discounts, or to start an advertising campaign.
Invoices That Can Be Factored Easily
Now that you know what are factoring invoices and why they can be your go-to option when in need of immediate funds, let’s take a quick look at the kind of invoices that can be easily factored.
Self-employed people are often in a position to factor their invoices as opposed to those who are doing business with other businesses and individuals. A self-employed person can bid on and prevail bigger contracts with larger and medium-sized companies and also government contracts for that matter. These types of invoices can be factored easily because they have large entities behind them.
Invoice factoring might not be a good solution for every business, but it is absolutely a great option for those who rely on having sufficient cash flow to purchase materials or sign new contracts.
It is easy to avail cash on invoice factoring, but that doesn’t mean you’re ready to go for it. Conduct an in depth research on all the options before making any final decision. If you think invoice factoring is right for your business, then make sure you do it with a reputable and trusted company. Also, don’t forget to review your contract carefully before signing the final agreement.
