Did you know that two out of three small businesses with employees close their doors after just two years?
If you’re a business owner, you know how difficult it can be to stay afloat, especially in the first few years. It doesn’t help when you constantly have unpaid invoices from your clients. Getting access to these funds is essential to keeping your doors open in certain cases.
That’s where invoice factoring comes in. Today, we’re going to explain how invoice factoring works so you can determine if it’s right for your business or not.
Don’t let your cash-strapped business break down when you know there’s money waiting for you. Keep reading and learn about the benefits of factoring invoices.
What is Invoice Factoring?
Basically, invoice factoring (or accounts receivable factoring) is a form of business financing where you sell your unpaid invoices to a factoring company. You get cash up front and the lender cashes in the invoices when they come through.
Unlike traditional lending, you’re actually selling these invoices, so there’s no impact on your business credit score. When you apply to work with a factoring company, they’ll need to verify the invoices, then release up to 90% of the invoice value to you immediately.
Upon receiving the invoice from your customer, they’ll release the remainder of the cash to you. All you have to do is pay the company a fee, which is usually between 1-5% of the value of the invoice.
To qualify for invoice factoring, you need the following:
- Unpaid invoices
- Clients with good credit
- To complete a factoring application
- Accounts receivable and a business bank account
- A tax ID number and personal ID
Benefits and Risks of Hiring an Invoice Factoring Company
Invoice factoring is an alternative to other types of business financing. For instance, SBA loans applications can take time to process, so if you to increase cash flow immediately, factoring can help with that. Having immediate access to your funds allows you to operate more freely.
There are disadvantages to invoice factoring, however. One big one is that you have reduced profit margins due to the fee you pay to the invoice factoring company. For that reason, it’s best to use invoice factoring when you truly need it and not every single time you have an outstanding invoice.
It can also be risky to work with unvetted factoring companies. You may end up having to pay hidden costs and fees that weren’t outlined clearly in the initial contract. This is rare, but that’s why it’s important to do your research before working with an invoice factoring service.
Is Invoice Factoring the Best Option for You?
So, now that you know a bit more about invoice factoring, is it really the right move for your business? It can be a really effective way to keep your business afloat, but you need to make sure the factoring company is reputable and that your clients have good credit for it to work.
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