Nearly every new or small business runs into financing problems. Companies need access to financing in order to make improvements, hire new workers, purchase equipment or expand their operations. However, qualifying for traditional bank loans is almost impossible for new businesses that may not have enough business credit to pass the loan qualification criteria. Even established businesses may have trouble receiving a bank loan due to years of company losses. Invoice factoring can be of help to these companies, providing them a way to finance growth without banks or debt.
What is Invoice Factoring?
In short, invoice factoring is a financial arrangement that allows companies to receive an advance on their future invoices. For example, when a business owner invoices clients he can submit the invoices to the factoring company who then advances him the bulk of the money upfront. In return, the factoring company assumes the responsibility of collecting on the invoices and uses the client's payment to make up the advance payment. After the final payment is made the factoring company remits the remainder of the invoice to the business after subtracting the factoring fee.
Invoice Factoring Fees and Terms
Generally, factoring advances are given in two installments: an initial installment of around 75 percent and a second installment of about 25 percent minus the fee. Depending on your company's record with the factoring company you may qualify for up to a 90 percent advance. In addition, the factoring fee is dependent upon your record and your customer's payment history. Fees range from as low as 1.5 percent to as high as 12 percent, based on these factors.
Qualifying for Invoice Factoring
Since factoring is not a loan businesses do not have to submit to a credit check or pass creditworthiness standards to qualify. However, there are other criteria that must be met. The business's customers are the ones who will be repaying the advance through their prompt payments so it's important that these customers have a record of paying their invoices on time and in full. If your clients tend to pay their invoices slowly you may have to pay a larger factoring fee in order to get your advance.
Figuring out how to finance growth without banks or debt can be tricky for new and small business owners. However, using invoice or receivables factoring to advance future payments and free up cash flow can help companies make the improvements they need without taking on additional business debt.