In the past, companies that were experiencing a cash flow squeeze due to slow paying customers had few options: get a loan or use personal money to bridge the gap. However, in today’s market, more and more companies are turning to invoice factoring & accounts receivable financing in order to make ends meet. The factor will advance the majority of the face value of the invoice, as much as 70%-90%, depending on the valuation of the invoice and then when the customer pays, will forward the remainder of the balance of the invoice minus their fee for factoring the invoice.
Naysayers of the process say that invoice factoring is much more expensive than traditional commercial financing vehicles. However, those who use factoring regularly like the benefits of this alternative form of financing. They get their money in 24-48 hours rather than having to wait 30-60 days for customer payment. Plus, they don’t have to worry about making the regular monthly payments that come along with bank loans.
There are many businesses that use invoice factoring to address short term cash flow issues while others use more regularly. Many small businesses use invoice factoring almost exclusively when getting started because their lack of time in business or established business credit makes it impossible to get a bank loan. Banks and other financial institutions rely heavily on your personal or business credit score in order to determine whether or not you are a good candidate for a bank loan. However, factors don’t take your business into consideration at all. They look at the creditworthiness of your customers. This allows businesses with little to no credit and even bad credit to sell invoices and get the cash they need to keep their business wheels turning.
The fees associated with factoring invoices may be higher than what traditional lenders offer, up to several percentage points higher. However, more and more businesses turn to invoice factoring to meet their cash flow needs because of the speed of financing and the hassle-free funding process.
As a matter of fact, billions of dollars in accounts receivable are entrusted to invoice factoring companies, especially those that reside in certain industries such as trucking, healthcare, and construction. Regardless of the business type, companies can use invoice factoring as a stop-gap measure for when cash flow is tight or in place of traditional banks altogether thanks to the reduction in paperwork and documentation.
Factoring isn’t for everyone though. Companies that have a business model that requires the issuance of many small domination invoices won’t likely be a good candidate for invoice factoring since the fees involved in reviewing every invoice for risk is likely to eat up a large portion of the face value. However, those companies that have larger ticket transactions and creditworthy customers can definitely benefit.
In addition to providing cash flow solutions, invoice factoring can help companies deal with collections activities. This allows companies to save money on staffing those functions.
Learn more about invoice factoring by giving Universal Funding a call. Find out more at www.universalfunding.com.