Steady cash flow is an essential part of maintaining and growing a successful small business. However, sometimes difficulties such as slow-paying clients and periodic slumps in sales inhibit cash flow. Invoice factoring provides you with the funds you need by turning your unpaid accounts receivables into working capital.
How Invoice Factoring Works
Invoice factoring involves selling your unpaid accounts receivables to a factoring company. The lender advances you a major portion of the approved invoices, usually around 85 percent, which you can use for your immediate financial needs. When the clients pay their bills in 30 to 90 days, you receive the balance of the accounts receivables minus a factoring fee.
Benefits of Invoice Factoring
Unlike loans and lines of credit from traditional banks, which may take months to acquire even if you pass the stringent requirements for qualification, you can obtain the funds you need from invoice factoring very quickly, sometimes in as little as a few days. The approval process for invoice factoring is much easier, because the factoring company is not so much concerned with your personal or business credit scores, but rather with the creditworthiness of your clients. Your personal and business assets are protected because no collateral is required. You also avoid the difficulties and stress associated with uneven cash flow. Since the factoring company takes over the collection process, you have more time to invest in business growth.
Invoice financing also involves using your accounts receivables to procure funding. However, instead of selling your invoices, you use them as collateral to obtain a cash advance. Your company retains the responsibility of collecting the funds owed by your clients, and you repay the lender on a regular schedule of installments. This option works best when your company prefers to communicate with your clients directly when handling their payments.
For more advice on invoice factoring and other forms of alternative financing, get in touch with 5 Star Funding Group.