The process of factoring your receivables is relatively simple. It is structured through the sale of your invoices to a factoring company. The factor buys your bills and pays them right away. So, you don't have to wait 30 to 60 days for customers to pay you.
This provides your company with immediate access to funds while the factor waits for your customers to pay. In short, invoice factoring is the purchase of accounts receivable, that is, unpaid invoices that are no more than 30 days old. You do the work, sell us the invoice, we advance up to 100 percent of the bill immediately and charge your customer the money.
Invoice factoringconsists of buying outstanding invoices at a discount.
You'll receive a cash advance on the purchase right after the factor verifies and purchases your receivables. Because you no longer own accounts receivable, you are not in charge of collecting them from debtors. In addition, because factoring is not a commercial loan, you don't have to make recurring fees. However, more often, factoring companies only work with companies that are willing to deliver most or all of their invoices.
Safe or service fee: In the case of your account, a factor could maintain a safe deposit box or a separate account to collect bill payments. Companies that work with third-party factors usually receive a substantial portion of the value of their invoices within a few business days, sometimes within 24 hours. Not suitable for companies with few customers: invoice factoring isn't suitable for companies with just a handful of core customers. Consider the time it will take your customer to pay their bill when determining your costs.
If you find that cash flow gaps due to slow payments to customers are restricting the growth or operation of your business, you might think that the solution would be to simply ask your customers to pay their bills sooner. It costs more if their customers are risky: factoring companies do their best to accurately determine the risk of late payment or non-payment of debt. Two powerful business tools that can help small business owners plan future expenses, such as taxes, salaries and insurance, are cash flow forecasting and invoice factoring. Many businesses fail because of poor cash flow, and invoice factoring can keep yours healthy, as long as you use it wisely.
Factoring alleviates cash flow problems over a slow period, especially for companies with limited resources and customers who pay slowly. Today, Internet access and technological advances have made factoring increasingly easier and more accessible for small businesses. Factoring companies occasionally offer so-called “spot” or selective factoring, meaning they offer their services for a single bill. So, instead of waiting 30 to 120 days or even longer to receive payment from your customer, finance your bill within 24 to 48 hours.
The best invoice factoring companies base their decision on the quality of their customers' credit, not on their own credit or business history. There are many components that factoring companies consider within their company and invoices when determining the eligibility of their business.