Having access to capital can be the difference between success and failure in business. An easy and low-cost method of accessing capital for many small businesses is invoice factoring (also called invoice discounting or cash flow financing).
Factoring invoices is when a company approaches an invoice financing company to borrow money for the rights to collect on a client’s invoice. Those businesses with outstanding invoices can leverage factoring as a unique financing solution. In addition, many seasonal companies need invoice factoring to solve their cash flow problems. This article will examine the basics of how factoring invoices work, the benefits of factoring invoices, and how you can start using them with your own business.
The Invoice Factoring Process: How Does It Work?
After validating and approving your invoices, you can receive funds from factoring companies up to 90% of the invoice value. An invoice factoring company will then collect the unpaid invoices. After your customers settle their invoices, your factoring company will send you the remaining funds, less its fee. Factor rates determine the factoring fees. Every week your customer takes to pay their invoice, a percentage fee is charged (usually 1% to 2%). In addition, a processing fee is sometimes charged at the point of sale by factoring companies (typically around 3%).
The Pros of Factory Invoicing
Easier approval. It is rare for banks to extend credit to small businesses, much less those with less-than-excellent credit. Your credit score is rarely a factor when it comes to invoice factoring. The lenders are more concerned with your customers’ creditworthiness since they are responsible for repaying your borrowed money. You may secure working capital via invoice factoring if your credit record, or time in business, makes it tougher for you to get other small business loans.
Easy access to cash. Small businesses’ working capital is more accessible because the application process is usually quicker and requires minimal paperwork. Invoice factoring offers the possibility to meet financial obligations in as little as one to three business days, enabling you to start working right away. In addition, factoring companies transfer funds directly into businesses’ bank accounts via ACH transfers.
You invest your time to grow your business than chasing clients. Cash flow enables your business to focus on its actual goals: growing. Also, invoice factoring is not a secured loan, requiring no collateral.
How do Factoring Companies Qualify Their Borrowers?
Below is a list of the ordinary requirements:
- Three years’ worth of tax returns (if available)
- Proof of ownership of the business
- Accounts payable aging report
- Accounts receivables aging report
- Invoices due within 90 days and without liens
- Balance sheet, income statement, cash flow statement, and cash flow projections dating back three to five years
- Business-to-business model, where you invoice government entities or businesses, not individuals
- Completed application form
How Factoring Can Improve Cash Flow
Using invoice factoring to improve cash flow can benefit business owners in the following ways:
- Employee Recruitment and Hiring
- Managing payroll during slow times
- Collecting unpaid invoices faster
- Marketing and advertising investments
- Increasing margins by buying more inventory
- New Equipment Purchase
- Project Materials Buying
Need Cash Quickly?
POM (Peace of Mind) Capital & Funding Services offers invoice factoring services that allow small businesses in New York to quickly turn unpaid invoices into cash. Learn how invoice factoring can help enterprises get money for their invoices today.
If you would like to discuss invoice factoring options with an experienced broker, call POM Capital & Funding Services at (631) 354-9290 or write to us at [email protected] to schedule a free consultation with our team.POM Capital & Funding Services is a leading provider of alternative funding solutions for businesses of all types and sizes, offering commercial finance solutions and products to businesses in the Centerport, New York area and throughout the state of New York.