Invoice factoring allows businesses to sell accounts receivables to third parties at discounted rates. Purchasers assume the rights to get payments for the invoices. Factoring companies pay a business up to 85% of the value of the unpaid invoice. The balance, minus the factoring charges, is paid when the company gets payments from the customers. With this transaction, a business gets immediate cash without having to wait for months. In general, factoring fees can be between 2% to 10%, depending on the customers’ credit profile. Below are the reasons a lot of businesses choose invoice factoring.
It Increases Business Cash Flow
Businesses that sell their invoices can have upfront cash flow and working capital expansion. Invoice factoring does not have a limit as it depends on sales turnover instead of assets capabilities. Sufficient working capital allows businesses to meet operational objectives and grab opportunities in the emerging market.
Eliminates the Need to Collect Customer Credit
With invoice factoring, businesses don’t have to use their own people for collecting unpaid invoices. This is because the factoring company does the job themselves. Also, the transaction will have a cost-cutting effect as the factoring company takes responsibility for credit control like collecting checks and maintaining sales ledger for transferred invoices. Invoice factoring companies will be a good fit for most small businesses in terms of advance rate. Businesses can save a significant amount of time as these functions are eliminated from their checklist.
Ensures Affordability of Financing
When compared with other financing sources, invoice factoring is definitely more affordable since it doesn’t come with high interest rates. Also, it spares businesses the need to borrow from banks and other financial institutions or raise capital from investors. For instance, businesses that go through a public sale of stocks will have to consume a significant amount of time.
Allows Easy Qualification
Businesses can easily qualify themselves in terms of invoice factoring since they just need to have credit-worthy customers. They don’t need to maintain high credit ratings for selling invoices to third parties. Instead, the business just needs to make sure they restrict credit sales to customers who are credit-worthy.
It Allows Spending Freedom
With invoice factoring, any business can decide how they spend the money. Typical business loans should be spent on the particular need for which the money was owed.
Every factoring company varies so businesses have to spend time shopping around and comparing offers, conditions and terms before they sign on the dotted lines. Also, they must take into account contingency measures like credit insurance against the possibility of bad debts. This is because when customers don’t pay, businesses may have to refund the factoring company.