As business owners, finding different ways to fund our company is an important part of the job that might have a significant impact on the future of our business. Depending on the size of our company, some funding alternatives might be more convenient for us than others. However, we should always take a careful look at all the options we could opt for before making a decision. One of these options is invoice factoring, which has become a great way for small and medium businesses to fund their companies and continue operating without problems.
Even when this is not a new concept, there are still a lot of questions among entrepreneurs and start-ups regarding what exactly invoice factoring is and how can they benefit from this. To answer the first question, factoring is a financing alternative that works differently from a traditional loan, for example. Factoring companies buy other companies’ invoices at a discount price in exchange for lump sums of cash.
In other words, factoring companies offer a cash advance for bills and invoices of money that your clients will eventually pay off. For example, they might purchase an invoice value of $10,000 for $9,7000, taking $300 as a factoring fee. They would give your company a cash advance of 80% to 85% of your invoice value within days and collect the remaining balance from the invoices once they are due.
There are many benefits and advantages that come from working with a factoring company that we shouldn’t ignore. The most obvious one is that factoring can provide our company with fast cash that will help us cover any funding gap that slow-paying customers might cause. This easy access to capital will also provide our company with the ability to stay on float should an emergency expense arise.
Another great advantage of factoring is that the process usually includes an easier approval period, unlike applying for a loan through a traditional bank. Even when there might be some kind of screening process, an invoice factoring company will always be more interested in the value and creditworthiness of your invoices and clients than in your company itself. This can help us understand why this financing alternative has become so popular with many small businesses from many different fields.