What is invoice factoring?
Factoring is the act of selling some of your invoices to a third party. This third party is called a factor. The factor buys your invoices from you for a fee" usually somewhere between 1.5% and 10% of the face value of your invoices. You receive some of the money up front, and the rest when the invoice is paid. Depending on how reliable your clients are, you can receive between 50% and 95% of the face value up front. This can help you ease immediate needs for capital.
When you sell your invoices to a factor, you are no longer responsible for collecting payment on them. Instead, the factoring company collects the money for the invoices. However, it is important to choose a reputable, professional and courteous factor, since your clients will judge you by who collects on the invoices. That is why so many business owners are choosing Advanced Commercial Capital as their factoring partner.
Once you establish a relationship with a factor, you can continue to sell invoices to that company. This is very helpful, because it allows you quick access to cash" sometimes as early as the same day. You can also decide which invoices from approved clients you want to sell, and how often you want to do so. It is a good way to control your cash flow and ensure that you only have to finance what you need.
How factoring can help you find business success
One of the difficulties that comes from operating a business that invoices clients is that cash flow is not always steady. You provide a product or service, you issue the invoice, and then it may take between 30 and 90 days for the invoice to be paid. Sometimes you find that you get a lot of orders at once, and then there is a lull. Both of these situations mean that there is irregularity in your cash flow. While money is coming, you do not have it in hand" but you generally need it now.
Another issue, especially for startups and growing companies, is that cash is needed for expansion. Your company is not really success unless it is growing. However, many traditional lenders are pulling back from providing loans to newer companies and smaller companies. Even older, more established companies are having a hard time getting loans. Factoring acts in the place of a traditional loan. Instead of checking your credit, the factor relies on the credit of your clients. If your clients are reputable and low risk, you will be approved, even if your business is not established enough to have a high credit rating.
Factoring provides you with the upfront cash that you need to grow your business and cultivate success. When you need to buy more equipment or hire more people or expand your ad campaign, factoring can help ensure that you can do all of those things by keeping the cash flow steady. This can also be helpful if you are just looking to create a solid base for a startup.
Many types of businesses can benefit from invoice factoring, but those that benefit the most are growing businesses and startups that deliver some sort of goods. Whether trucking companies, wholesalers or distributors, factoring offers a way for the cash to continue flowing. This is essential to most businesses, and when you can’t get traditional financing for your business, factoring can fulfill the need.
Related Article: Invoice Factoring vs Invoice Financing: Factoring Basics >>
