Often businesses with slow-paying clients have problems with cash flow. Although their books may show a profit, and they can rely on their customers to eventually pay, they experience short-term difficulties in handling office rent, employee salaries, inventory purchases, and other necessary expenses. One solution to this dilemma is invoice factoring, also known as accounts receivable factoring. Here’s how this form of financing can work for your small business.
The Basics of Invoice Factoring
Invoice factoring involves the selling of your accounts receivables that are payable within 30 to 90 days to a factoring company. After selecting a company to deal with, you submit an application. The factoring company conducts due diligence to determine the creditworthiness of your customers and then offers you a financing agreement with a maximum borrowing amount. You receive an advance of about 80 percent of the value of the approved accounts receivables that you can use to boost your cash flow and handle your business expenses. After your clients pay the factoring company according to the invoice terms, you receive the remaining 20 percent minus a financing fee.
Qualifying for Invoice Factoring
Because the factoring company is concerned with the creditworthiness of your customers rather than your own, accounts receivable factoring is ideal for startups and other small businesses that have not yet earned high business credit scores. To qualify for factoring, your business must have established clients with good credit scores that have invoices payable within 90 days. Additionally, your company should be free of severe legal or tax difficulties.
Details of Invoice Factoring
If you decide that accounts receivable factoring is the right financing solution for your small business, take the time to research various companies and their fees and terms. For instance, some factoring companies communicate directly with your customers while verifying invoices and collecting payments, while others work through you. Find out whether the companies practice recourse factoring, which means that you are liable for the debt if customers don’t pay on time, or non-recourse factoring, which means the factoring company assumes the risk of unpaid invoices.
For more advice on invoice factoring, contact Business Capital Providers.