Invoice Factoring Basics Explained
Budgeting or business financing can be considered as one of the biggest challenges that all businesses must face. Sellers often need to wait for 30 to 60 days before their customers complete their payments. Because of this, a large portion of the business budget is often tied up in the customer invoices. For businesses with a limited budget, this could pose a big problem. If you’re an entrepreneur, what can you do solve this problem?
The Role of invoice factoring
When working capital is not available, your existing invoices can help you save the business. How? By acquiring invoice factoring services, you can take out the cash advance you need from your unpaid invoices.
Invoice factoring is also known as account receivables funding or purchase order financing. This is done by selling your invoices to a factoring service provider. Thus, instead of waiting for 60 days until your invoices are paid, you can take out the cash advance you need right when you need it.
How does accounts receivable factoring work? Rates may vary from one factoring company to another. The average rate given by most companies in the market is usually 80% cash advance from the total amount of the invoices submitted. Other factoring companies may give only 70% cash advance while others may offer a higher cash advance of 90%.
After receiving your cash advance, your factoring company would take charge over the collection of payment from your customers. When your customers have completed their payments, you will receive the remaining percentage or rebates from the invoices you submitted. In case your customers failed to make repayment, the rebates will be lost. This is why business owners should choose the invoices for factoring with care.
Accounts Receivables Factoring and Your Business
Factoring business invoices is a popular method of financing used by both small business and large companies alike. This is because invoice factoring is a lot easier to obtain than trying to apply for a bank business loan.
Any type of business can acquire account receivables factoring services as long as they have already been in the operations for at least two years. This is a common requirement for most factoring service providers. The products listed on the purchase order you’ll submit must also be delivered and received by your customer.
When your accounts receivable factoring application has been approved, the cash advance can be sent through wire money transfer or through your bank account, depending on the factoring company. The funds can be obtained on the same day or for as little as 5 business days. Afterwards, your customer will receive a notice from your factoring company informing them about the factoring process. Many business suppliers are already familiar with the concept of invoice factoring so this should not be a problem.
Again, we emphasize the importance of choosing invoices from your good customers only. Customers with good credit history and who have been loyal clients of your business are the perfect candidates for invoice factoring. This is because you can be sure that these customers would complete their payments from their purchase orders.
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