Factoring: Financing for your Small Business

One of the major setbacks that small businesses face is lack of funding. The cash flow is further strained by unpaid invoices. With the strict procedures and long application process for a bank loan, most of them are left looking for alternatives. Invoice factoring is one of those alternatives.

What is invoice factoring?

While it is not a loan per say, it is the best way for small businesses to secure funds. Invoice factoring is where a business owner sells his unpaid invoices to a third party, usually a factoring company, at a discount, in exchange for a tidy sum of money. A discount rate is charged based on various factors like the sales volume, invoice amount and the customer’s credit worthiness ad deducted from the amount payable. The factoring company usually get their money back when all the invoices are paid up.

There are 2 common types of invoice factoring:
Recourse factoring– this is where the small business only sells the invoices to a factor. Should the debtors fail to pay uncollected invoices; the business will have to buy them back.
Non-recourse factoring– for this type of factoring, the lender assumes all liability for the uncollected invoices. This is the most preferred by small business owners.
Some main features of invoice factoring include a short period of between 3 to 6 months, discount rates and due diligence by the lender to determine creditworthiness.

Benefits of factoring for small businesses

Some of the reasons why invoice factoring is very popular among business owners include. Improved cash flow- through this mode of financing, small businesses manages to retain their loyal customers and still get funds. This helps in growing the business.
High rates of approval- unlike other sources of financing, invoice factoring does not have strict qualifications. This makes it the best options for small business owners with bad credit or a business with limited credit history. The only thing the factoring company looks at are related to the invoices.
No collateral required- invoice factoring is a type of unsecured financing. This means that small business don’t have to put out their assets as collateral.
Fast source of funding- it provides immediate capital that can be used to cover funding gaps and meet short term business obligations.

Small businesses, especially start-ups, rarely have a credit history or assets to put up as collateral. This rules out most methods of financing like traditional bank loans. Despite being a bit expensive, invoice factoring remains to be one of the best ways to finance a small business.

Everything you need to know about Invoice Finance

There are a few benefits that can be picked up when a company chooses to invoice finance. A business that deals in the sale of products or services to different businesses will receive the advantage of enhanced cash flow by utilizing an invoice finance service.

What Does Invoice Finance Means?

Essentially, to invoice finance means to sell or assign your outstanding invoices to an cash flow finance company. This company, as a rule, will give you instant access to a percentage of the total amount of the unpaid invoices assigned to them, normally from 70-90% of the value of approved invoices. By and large, they may likewise assume liability for invoicing, chasing and collecting owed invoices and additionally acknowledge a percentage of the loss on unpaid invoices.

Benefits of Invoice Finance 

Cash Flow Increase

Approaching these funds significantly increment the cash flow inside your company. Cash on hand for expanded production, savings by a method for discounts on company expenses, decrease or even elimination of costs of doing business, and enhanced open doors for business loans.

More Sales 

By utilizing an invoice finance service there are no waiting 30-45 days for individuals who pay on time and much longer for late payments on invoices. That cash on hand can be more promptly available for production, creating an immediate availability for more sales.

The advantage of Discounted Payments 

Another zone the correct business can increase more prominent cash flow from utilizing invoice finance is in taking advantage of discounted payments of operational expense. Many companies offer discounts of as much as 10% if their invoices are paid on receipt or inside a specific time frame.

Better Terms From Suppliers 

With invoice finance, you have cash on hand to pay your bills sooner, as opposed to holding up until the point that your customer pays you for your item or service. Expanded cash flow likewise builds your companies buy power, improving it conceivable to negotiate terms or discounts from providers. The savings in these two areas alone will, by and large, outweigh the charge from the invoice finance service.

Different Benefits

There is a different operational expense that can be reduced or even eliminated when utilizing invoice finance, for instance, administration costs, stationery, and office hardware. While including the cost of employing an accounting clerk, their salary as well as company benefits, it’s anything but difficult to see some extraordinary advantages to utilizing an invoice finance service.

Invoice finance can be especially helpful to a business in the start-up phase. Most lending institutions have strict rules on lending to ‘new businesses’. A bank or moneylender will just think about a small bit of outstanding (unpaid) invoices owed, frequently just 40% of the total amount of outstanding invoices, while administering a business advance. By invoice financing, your record indicates cash on hand instead of a large amount tied up in outstanding invoices.

Disadvantages of Invoice Finance

There are a few disadvantages to utilizing an invoice finance service. The products or service your company supplies can hugely affect whether your company should utilize invoice finance. Businesses giving recurring services or item arranges are great candidates, while invoices for one-time requests may think that its difficult to acquire this sort of funding.

These companies want to know the debtor and their reputation in paying obligations previously tolerating invoices owed by that debtor. Another disadvantage would be if the markup sale cost of the products or service provided was not exactly the amount of the invoice finance charge.

For the correct business consolidating the enhanced cash flow with a sensible net revenue alongside expanded sales arranges the business is in a situation to expand and the expense to invoice finance can without much of a stretch be caught up in expanded profitability.