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Invoice Factoring: Is It the Right Option for your Business?

  • by Lucas Mohammed
  • 3 Months ago
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Does your business need a short-term capital? If so, you may want fast cash and low rates. For this need, invoice factoring can be a sensible option for your business. This option helps in managing your cash flow during tough times of the year without having to commit to long-term debts.

What Exactly is Invoice Factoring?

Factoring invoices is a kind of asset financing. It transforms your customers’ outstanding invoices into immediate cash. Selling your invoices to factoring companies will let your business gain short-term working capital. The company offers a percent of the amount of the invoices upfront and collects your customers’ payments.

How the Process Works

Invoice factoring involves the following steps:

  • You send an invoice to a client. After giving a great service or good to a client, you send them your invoice to get paid. Such invoice must include payment terms so your client knows how to pay. If the invoice is due within 90 days, waiting for it can have you stuck in terms of working capital. But invoice factoring helps you get the needed cash.

  • You sell the invoice to a factoring service provider. There are many factoring companies in the industry today. Factoring Company Guide is one of the most reputable factoring companies US. Once you find one, they will decide your qualification and perform credit checks on your clients to determine their creditworthiness. When your application is approved, a contract will be signed by you and the company.
  • You get an advance rate. This advance rate is the 80% of the invoice amount. Your client will be sent a notice regarding the involvement of a third party to collect your invoices.
  • The company gets paid by your client. If the invoice is due, the factoring service provider collects payments based on the invoice terms. The company will keep the payments in a lockbox.
  • You get the remaining 20%. After the company gets the payments for all the invoices, they will give you the reserve amount of 20%, minus fees.

What is it for the Factoring Company

The main cost of using a factoring service is the discounted rate. Often, such rate ranges from 0.5% to 5% of your invoice every month. A tiered system is common among many factoring companies. Factoring more invoices every month allows you to get a lower discounted rate. The discount rate will usually be charged every week or every month.

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