When business owners experience cash flow issues, they look into different financing solutions to address the problem. One of the top choices is invoice factoring.
Invoice factoring is a form of financing which allows businesses to access immediate financing by using their pending accounts receivable. Technically, factoring is easier than other forms of financing because this is not a loan but rather involves selling of invoices from your creditworthy clients. Factoring companies do not look at what collateral you can give so it is very accessible even to small businesses.
How Does Invoice Factoring Work?
Most factoring instructions are done in two installment payments. A factoring company will release about 80 percent of the funds on first installment. Typically, the funds can be available within a day of approval. The remaining funds, less all the fees involved, are released when the invoice has been paid by your customer.
Of course, the factoring company will verify the invoices submitted prior to funding. The company wants to make sure that there are no issues involving the invoice. So, this does not work if the pending invoice involves disputes, chargebacks, among other clearing problems.
The amount you can get from factoring companies depend on your sales. When your sales go up and you have more creditworthy customers, the amount you can tap can go up.
Requirements Of Invoice Factoring
Unlike loans, invoice factoring is a easier and quicker to get. The factoring company does not look at the risks but evaluates your needs and what help it can provide based primarily on your invoice and the creditworthiness of your customers who will clear the invoices.
Here are the primary requirements:
You Own And Operate A Business. Invoice factoring only works for businesses registered as an LLC or as corporation, or any similar alternative. Some might be willing to work with partnerships and even sole proprietorships.
Good Profit Margin. Because of the cost, factoring is a perfect financing solution for companies with good profit margin. Depending on the size of your business, profit margin should usually be 10 to 15 percent.
Government Or Commercial Clients. Factoring companies can only buy your accounts receivable if your clients re government or commercial entities.
High Quality Invoices. The invoices you required for factoring are high-quality invoices from your customers that are creditworthy. The factoring company must be able to determine that these businesses will pay up. The invoices should also be of liens or should be have been used as collateral in other transactions. If you have a tax lien, factoring companies might still be able to work with you as long as you have a payment plan and the taxing authority should agree to subordinate the liens on the account receivables.
Good Character. With no collateral required, you must be able to show that you’re of good character. So, yes, they will look into your records and see if you have criminal records and other similar issues.
If you are looking for the best factoring companies to help your business, learn more about it at www.factoringcompany.net.
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