If your business is in an industry where you purchase goods and / or services in large amounts from other companies, perhaps in bulk orders on a monthly basis, you are familiar with the practice of paying an invoice for such transactions. On average, an invoice is paid within 30 to 60 days, although more time may pass before the seller receives their funds. For the company awaiting payment, they are sometimes put in the dubious position of having to deal with problematic customers who cannot pay on time, which obviously delays the payment process. Therefore, many businesses are continuously waiting for their funds to be delivered.
An option that many businesses may take when they find themselves in this kind of troublesome position is to deal with a factoring company. Known as invoice factoring or accounts receivable factoring, this form of payment helps those who have to endure the delayed billing process. Factoring is a type of secured funding that involves the selling of invoices for instant cash at a discount to a factoring company, who acts as an outsourced credit agency. Invoice factoring can help small businesses to improve their cash flow through an immediate advance of funds, and the funds go to a credit department who handles the entire process.
It is important to keep in mind that accounts receivable funding is not a type of loan; it is simply an advance against your customers' invoices. In essence, it brings you tomorrow's money today. Factoring covers much of the work relating to processing invoices, such as depositing checks, posting invoices and entering payments.
Furthermore, invoice factoring is a source of financing that allows your business unlimited capital. Having access to your own funds – instead of knowing that the money is being “tied up” in prior transactions – will help you to cultivate your business. As your business gradually grows, so will the amount of funding made available to you. In time, a flexible amount of working capital gives you the time and potential to realize your new plans for the future. Invoice factoring allows struggling companies to stay afloat during periods of poor performance or in fallow parts of the year when profits are not as substantial and staff members are not as busy.
The fundamental question to ask yourself is if invoice factoring is the correct remedy for the type of financial predicament that your company might be facing. The CEO of the business will have to determine whether invoice factoring is a good fit for the company, and if upfront cash can prove advantageous in the long run.
Before beginning the accounts receivable process, it is wise to verify with a factoring company if your business is qualified. In some cases, a number of situations may have created a lien on your invoices, and you may not end up qualifying for the invoice factoring process. For example, if your company has had a business loan some time ago, it is to be expected that the bank has previously filed a lien on your invoices so that they can secure collateral. Additionally, if you have been a victim of a lawsuit, it is likely that your business could be burdened by a lien. Other than that, the list of requirements is small and the qualification process itself is quick, simple and straightforward.