How to Finance Your Small Business with Invoice Factoring
Having cash on hand is not always an option for small business owners. Invoice factoring or invoice financing can provide the cash you need against your existing invoices. Don’t go into more debt to get the ready cash your business needs to operate.
Instead of collecting the full amount of an invoice and waiting for that customer to pay, you can sell the invoice to a factor at a discount. A factor or lender advances the necessary cash at the discounted rate. The factor then bills and collects the full amount from the customer. They take their fee off the amount and the cash advance already given. The remaining amount is then remitted to the business.
Invoice factoring allows the company to obtain the necessary cash without adding debt to the company. Another benefit is the ability to obtain the money without applying for other forms of financing that can take longer to approve. No collateral is required, and the company’s credit scores are not the main factor in determining approval. The customer’s credit scores and payment history are the key components factors look at when deciding. This is a great option for cash-strapped small businesses who may not have the best credit scores themselves.
However, invoice factoring isn’t always the best option for obtaining business capital. In addition to the factor’s collection fee, many also have fees for credit checking, processing, being late and application. If the customers have bad credit, you may not be able to use this type of financing. If the company is unsuccessful in collecting the payments, the business must either replace it with an equal value invoice or buy the invoice back. Plus, the company loses control over collecting and billing those customers for those invoices.
However, invoice financing allows the company to still handle the collection and billing of their customers. The business obtains the cash advance from the lender, collects the payment from the customer then remits the payment of fees to the lender. If handling the customers directly and keeping control over the operation are essential to you as an owner, invoice financing may be a better option.
Depending on the factor chosen, your business may have the option of invoice factoring or invoice financing. Discuss the benefits and cons of each one to determine the best option for your business. There are also many other options small business owners have to obtain business capital.