Growing businesses often struggle with their working capital needs, and in most cases, conventional financing isn’t a choice, owing to the strict terms of lending. Invoice financing, otherwise also known as accounts receivable financing, is one of the best ways to improve cash inflow into the business, without relying on a loan.
How does it work?
Invoice factoring is a simple process, where companies sell their accounts receivable to a factoring company to get a quick loan. You can expect to get anywhere around 80% or even more of the total invoices, and the rest will be transferred when the debtors pay the invoices. Please note that the factoring company will charge a part of the remaining payment as their factoring fee. To get the loan, you need to contact one of these factoring companies, and they will check the creditworthiness of your debtors. If things go right, the payment will be sent via wire transfer or direct deposit on the same day. Open invoices that are due for more than 90 days will not be considered for the loan.
Things to consider
While factoring is a known and effective source of working capital, finding a factoring service can be complicated. Not all companies offer loans in all sectors and industries, and you need to find a reliable one. First things first, look for a service that’s reputed in the industry. A factoring company should have a solid reputation in the market and must be well-funded, as well. The concerned company must be interested in your business objectives and they must explain the factoring process to all new customers. The fee should be transparent, without any scope for hidden charges. The company must also make a commitment of returning the remaining funds on time, without any delay once the debtors have paid.
Invoice financing or factoring is effective and useful for many reasons. It is not like taking a loan, where you have to wait for months to get a nod. Also, you are not pledging an asset but are getting a loan against invoices that have not been paid as yet. In short, this form of financing doesn’t impact the balance sheet, as long as the debtors pay on time.
Take your time to evaluate the options, and before you take the loan, do read the relevant terms and conditions in detail. Check online now to find the best factoring companies.