How Invoice Factoring Can Help Your Business

When you sell a product or service and bill customers at a later date, you can quickly find that your cash flow is out of balance. Waiting for slow-paying customers to settle their outstanding invoices can end up putting you behind on paying your company’s own accounts receivable (another term for bills and expenditures.) Invoice finance factoring can be beneficial to companies in need of access to cash to handle expenses when customers are slow to pay on invoices.

The roll of US federal reserve notes $100. Old style photo.

What Is Invoice Finance Factoring?

Invoice factoring is an alternative to a bank loan. With one of these agreements, an invoice finance factoring company agrees to purchase your outstanding invoices from you. You receive a lump sum up front equal to a set percentage of the total amount of the invoices owed. When customers pay the invoices, you receive the rest of the funds less a fee called the factoring fee.

 

As an example, let’s say that you had a total of $25,000 in outstanding invoices. You agree to an invoice factoring arrangement where you receive 80 percent up front and 19 percent at settling with a 1 percent factoring fee. When you sign the agreement, the invoice finance factoring company would give you a total of 80 percent of $25,000 or $20,000. Once your customers pay, you would receive $4700 more. The company would keep $250 as the fee for providing the service.

 

If for some reason your customers failed to pay within the required time frame, you may lose all or part of the second $4700 payment. You might also have to repay some of the initial lump sum if the shortfall is larger than $4700.

 

Why Use Invoice Factoring?

There are three main benefits to invoice factoring:

  1. You’ll receive fast access to cash. With invoice factoring, you can infuse cash into your business very quickly, so that you can cover costs like payroll and purchasing materials.
  1. The qualifications for approval are more relaxed. Because the invoice factoring agreements are secured by your accounts payable, the requirements for approval are less strict than those for bank loans. If you have bad credit, are a startup or don’t have collateral, you may still qualify for invoice factoring. This is true even if you’ve been turned down for a loan.
  1. You won’t have to focus on collecting. The invoice finance factoring company will take over the responsibility of collecting from your customers, giving you the freedom to focus on other parts of your business.

Disadvantages of Invoice Factoring

Before entering into an invoice finance factoring arrangement, it’s important to know that there are some drawbacks to these agreements, including:

  1. They are very costly. When you consider the size of the fee assessed by invoice factoring companies, the arrangements are one of the more costly ways to get access to cash. The fee can be the equivalent of a 12 to 60 percent annual percentage rate on a credit card.
  1. The company’s collections tactics reflect on your reputation. The wrong company could strong arm or harass your customers for payment and end up hurting your business.
  1. Your customers’ credit matters. Although the invoice factoring company doesn’t place a big emphasis on your credit or your company’s, they will evaluate whether or not your customers are creditworthy. There is a chance that slow-paying customers may not qualify for the arrangement.

 

For more information about invoice factoring,
please contact (888) 778-5677.

Or fill this out this form and an invoice factoring application and we will contact you asap!

Elizabeth Roberts

Elizabeth Roberts

Liz Roberts and her team are continuously providing information to people who are ready to repair their credit and improve their credit score. Also NewHorizon.org team strives to empower the homebased and small business owners by bringing information that can help them to manage and grow their businesses. Let our 24+ years of business finance experience help you to get the financing you need! CONTACT US if need financing for your business.

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NewHorizon.org is an independent, advertising supported website. The owner of the site may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. NewHorizon.org has not reviewed all available credit card offers in the marketplace.

Privacy Policy Terms of Use

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