It is no secret that money is an essential part of a successful business. All businesses need money to operate effectively, and some may need short-term or even continual funding solutions that can provide quick access to cash your business is no exception. There may come a time when you might need some quick cash to meet payroll or purchase inventory, or perhaps a quick boost to your companys working capital so that you have extra money on hand. Regardless, businesses have a number of funding solutions available to them today - business lines of credit and small business loans being only two of the many.
An important solution to consider is business factoring, which is an underused yet highly advantageous method of receiving financing for your business.
What is business factoring?
Business factoring, which is also called invoice factoring, allows you to receive money from your business unpaid invoices through a factoring company or a factor. Factors take your accounts receivable, review them, and upon approval, advance you a certain percentage of the overall value of your submitted invoices.
Essentially, invoice factoring services provide a fast-funding option for large and small businesses who meet certain criteria. Unlike business loans and lines of credit, your personal and business credit history do not come into play. Qualifying for business factoring relies on your monthly invoices and the credit worthiness of those to whom you extend a limited line of credit through invoicing.
The process of business factoring
On your end, factoring will be a simple and straightforward process. You will begin by compiling and making copies of the outstanding invoices that you want funded. Be sure to double check that all required information and signatures are in place before handingyour invoices over to the business factoring service to avoid future delays.
Once the factor has possession of your invoices, they will perform certain checks on your clients to verify their payment history and their credit worthiness. This information is used by A R factoring companies to determine whether they can accept your invoices, how much money you are eligible to receive up front, and the discount rate that they will charge you for their services.
After the factoring business checks out your clients, they will look over each original invoice to make sure they are free of errors, discrepancies, and missing information. Once the factor validates the invoices, they send out a notice of assignment to your clients, which is a document informing your clients that their outstanding balances should be paid directly to the factor rather than your business.
It takes an average of two to five days to receive your advance from the factor once your clients invoices have been validated, however, if a factoring company allows online invoicing, you may be able to receive your funding in as little as twenty-four hours. Generally, factors deposit funds directly into your business bank account, though some still rely on cutting paper checks to distribute advances to businesses.
Your initial payment from a factor will usually be 70% to 90% of the value of your accounts receivable. You will receive the remainder of your advance, which will generally ranges from 3% to 5%, once the factoring company has collected from all of your clients.