Invoice factoring is an excellent tool for businesses. To make the most of it, you need to understand what it is, how to use it, and how to get started. This article answers the most frequently asked questions about factoring that business owners have. It can help you take your business to the next level with minimal risk.
What Is Factoring and How Does It Work?
Factoring involves selling accounts receivables to a lender. It’s not a loan or a lease. It doesn’t involve applying for funding or making payments later. Instead, this type of financing acts similar to a cash advance.
By factoring invoices, or selling them to a third-party lender, you receivable capital right away. The lender, also called a factor, now owns the accounts receivables and takes care of collecting on them. Of course, the factor collects in a way that is respectful to your customers and professional, completely different from a collections agency.
When factoring an invoice, your business generally receives most of the value of the bill immediately, deposited directly in your bank account. Another percentage is held back until your client pays the invoice. Afterward, you receive the final amount minus a small fee.
How Many Invoices Do You Have To Factor?
You have quite a bit of flexibility when carrying out the process of factoring. For example, you decide how many invoices to use in this way. Some businesses only rely on factoring from time to time, such as when they need money for an emergency.
Other companies prefer to turn over their entire accounts receivables department to the factor. That way they never have to worry about collecting again. They receive profits immediately and are able to focus on sales rather than billing. Many small businesses and e-commerce businesses operate this way to minimize the amount of money they spend on payroll.
How Can You Get Started?
Applying for factoring doesn’t take long. Mainly, the factor needs to see that you have customers with good credit. As long as most of your clients have a history of paying on time, getting started is easy. You don’t need perfect credit as a business owner. After filling out the application, you should find out if you qualify within a few days.
The next step is to sign a financing agreement. This contract explains the details about the percentage charged for factoring, the maximum amount you can receive and other information. You should read this contract carefully to make sure you understand it. Good factoring companies are happy to explain anything you don’t understand. After all, they want you to be a business partner for a long time.