Invoice Factoring As An Alternative Financing Solution

An invoice is a document that has a list of what is owed to you for goods and services rendered. It is a demand for payment from your debtors.

There is usually time between when the invoice is received and when payment is made when the debtor scrutinizes the invoice and reconciles it to the goods or services received. The time taken is the credit period and it is usually agreed upon between the creditor and the debtor before services and products are offered.

The credit period can range from as few as payment on-demand where an invoice is settled immediately it is received, or it can be as long as 90 days. In international payments, the credit period may be even longer due to shipment and other delays in clearance of goods.

Invoice factoring is when a business leverages its invoices against cash to a third party called a factor. The main reason for invoice factoring is to avail immediate cash business to meet its current obligation. The invoice factoring company will then wait until the creditor pays to get its cash back. Invoice factoring is, therefore, a good source of debt finance.

How Invoice Factoring Works

A company delivers goods or services to customers who are reputable and sends them correct invoices. The company receiving the goods acknowledges receipt of the invoices.

Due to the time it will take to receive payment from the debtor, your company sells the invoices to an invoice factoring company otherwise known as the factor.

The invoice factoring company verifies the invoices by contacting the debtor and once the verification is satisfactory, your company receives up to 85% of the invoice amounts immediately. The amount you will receive will depend on your agreement with the invoice factoring company.

The invoice factoring company then receives the payment from the debtor and deducts a fee for the service it offered you. If there is a balance, it is forwarded to your company.

Invoice Factoring as Alternative Financing Solution

As a company, you can use invoice factoring to meet your immediate cash flow needs. The only collateral you need is the invoices from reputable companies and clients. Invoice discounting companies do not require many documents compared to banks.

Invoice factoring is a great way to get short term debt to keep running your business without having to worry about your short term obligations such as salaries and rent. With invoice factoring, you are assured of cash to produce goods and services for other clients.

Finance For Your Small Business

One of the major setbacks that small businesses face is lack of funding. Where often cash flow is further strained by unpaid invoices. With the strict procedures and long application process for a bank loan, most SME’s are left looking for alternatives. Invoice factoring is an alternative form of small business finance when mainstream options may not be available.

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.
There are 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. It also 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.

Fix Cash Flow Issues With Factoring

Factoring with Nova Cash Flow Finance

When an SME is facing cashflow problems mainstream, thinking by big financiers is that the business owner will call on personal savings. Unfortunately, by the time the cashflow crunch hits, personal savings have already usually been exhausted. Also exhausted are those of close family and friends.  When you are experiencing cashflow distress it’s time to consider factoring with Nova Cash Flow Finance.

The next step is NOT a loan.  Although its difficult for a small business to get a loan to assist growth when times are good there’s no chance during cashflow distress.  The chance of a bank approving a business loan or overdraft in hard times is almost impossible.  

Time to consider factoring but you have no money in the bank and no security to offer.

That’s okay.  The whole premise of factoring is that the risk is in the debtor’s ledger of the business owner. Not the business owner. So if you have no money in the bank and no security to offer but you have a good spread of debtors, that pay reliably then this is what the factor will look at to assess your eligibility for funding.

The question of creditworthiness

To the Factor, the creditworthiness of the debtor is the biggest factor to consider before approving a funding line. When an application for factoring is made by the business owner, the lender first checks the applicant’s creditworthiness.

Negative information will not necessarily impact a client application for a funding line. However, it is always investigated.

What can impact the application is negative credit information on the debtors.

Risk management presents a constant and ongoing challenge for all factors no matter the size.   To ensure the factors interests are fully protected the debtor must be assessed for risk of non-payment. This does not need to be done repeatedly for the same debtor but every debtor needs to be assessed.  The process is thorough and there can sometimes be a gap between submitting a debtor for approval and funding the debtor’s invoice.

Factoring to the rescue

The factor will fund the underlying asset or invoice of the business owner at an agreed percentage of the invoice value.   This makes factoring an immensely useful tool for business owners who have just set up their company or those who are recovering from an economic downturn that has affected their cashflow.

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