Businesses face financial struggles after starting up. That’s an inevitable thing that can happen to you especially if you are not an experienced entrepreneur. Rest assured that it’s a common thing for companies to undergo a lot of financial pressure during the course of their business. What’s not common is letting the financial pressure affect your business decisions badly. So, if you are currently under this type of situation, there’s something you can do. You can borrow money from banks and financial institutions or sell your receivables. Selling your receivables is called invoice factoring and it is a well-known method to finance a business. If you think this is the best way for your business to stand up, here’s what you need to know about invoice factoring and its benefits.
What is invoice factoring?
Invoice factoring is a factoring finance method wherein you will sell your accounts receivables to a third-party called the factor. Receivables are achieved when you sell your products and services to your customers. You exchange your goods for the amount they are going to pay in the future. Most of the time, vendors give terms to customers so they can enjoy discounts for paying the receivables early. For example, a vendor or your business will provide 2/10, n/30 terms for clients who will buy on account.
However, not all customers can pay early even with discounts. There are times that you will have to wait for more than 30 days just to get their payments. As someone who is continuously running a business, this can affect your cash flow and your overall business decisions. This is one main reason why companies are choosing to sell their accounts receivables in exchange for funds that they could have gotten from paying customers.
So, what are the benefits of invoice factoring financing?
First and foremost, it allows you to get the funds you need for your business. The main purpose of why you are selling your receivables is to get additional money to keep your business running. If you are going to use this factoring finance method, you’ll be able to get the amount you need in your hands.
Second, it reduces your hassle of asking your customers to pay. Invoice factoring is selling your accounts receivables to a factor. This means that you are transferring the responsibility of an AR owner. The factor becomes the owner of the receivables so he/she should be the one contacting your customers to pay. With this factoring method, you are going to save yourself a lot of time. Communicating with customers might take a while. You don’t have to worry about this anymore once you find the perfect factor.
Finally, invoice factoring will only cost you around 5-10% of the account receivable plus the factoring fee. If there are variances as to the amount collected, the money will be deposited back to you. Compared to the amount you are going to get, a 5-10% discount is not that big especially if you really need the funds for your business.