Cash is extremely important to running any business. Cash allows you to pay your employees’ salary, your bills and other daily business operation. Unfortunately, even some profitable businesses may not have enough cash, since not all customers provide payment for earned revenue immediately. However, if you are a business that provides goods and services to other businesses, you can solve your cash flow problem with invoice factoring.
An invoice is a document that you send to your customers that lists the goods or services that you have provided, how much they owe and when are they obligated to pay. Giving your customers the option to wait before paying can be great for business because they are more likely to use companies that allow them such leeway. What do you do, though, when you need cash right away, not thirty or sixty days in the future? You may apply for a bank loan, but a bank loan also takes times. Additionally, you often need to have good credit and some form of collateral in case you cannot repay the loan.
With invoice factoring, you won’t need to worry about any of that. When you factor your invoice, you sell your invoice to a special company for immediate cash. Normally, you will first get an initial advance, which often may be greater than eighty percent of the invoice’s amount. Then, when the factoring company receives payments from your customers for those invoices, you will receive most of the remaining amount.
You will not receive one-hundred percent for the invoices, though, since the factoring company takes a small percentage as a factoring fee. This fee depends on various elements like the invoice amount, the size of the sale, the invoice’s age and your customer’s reliability in paying you. Another important thing that determines the fee is whether the factor is non-recourse or recourse. If it’s a recourse factor, you may be obligated to purchase the unpaid invoices or provide the factoring company with newer invoices that are worth the same or greater than the unpaid invoices. If it’s a non-recourse factor, on the other hand, you won’t need to do anything if the invoices are not paid. Nevertheless, the fee for a non-recourse loan will usually be higher than the fee for a recourse loan. The more risk the factoring company takes, the higher your fee may be.
Invoice factoring offers an excellent way for businesses to receive the cash they need without going through the hassle of filling out long applications and waiting for approval. Instead, you can just sell your invoices to a factoring company for immediate cash.