Cash management and the management of operating liquidity are important for the survival of any business. You can be making a profit, but still have problems with cash flow. Start-ups and small businesses have traditionally had difficulty raising capital through outside sources and, for new companies, the chances of getting a bank loan is close to zero. Most banks today won’t even consider lines of credit or loans for companies that have been in business less than 3-5 years. Start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without proper cash flow, it is difficult for a small business to maintain payroll and pay its bills. This is why, as a business owner, it is important for you to understand all about invoice factoring.
Invoice factoring enables small businesses to obtain the cash necessary to keep the company running by getting the money they need without having to go to a bank for a loan or take on additional debt. What they can do instead is sell their receivables at a discounted rate to a factoring company. Factoring companies pay cash for the invoices and handle the collection process.
A factoring company usually pays 70 percent to 90 percent of the total invoices. Then, after collecting the invoices, the factoring company returns them to the small business owner. For this service the small business will pay a fee of 1.5 percent to 3.5 percent of the total invoices.
Factoring can be a great option for companies that need money quickly, but who aren’t able to secure a conventional bank loan. The seller gets the capital that they want or need and the factor is able to make money by charging the seller a discount fee on the invoice. A good factoring company will research the credit history of the seller’s customers prior to purchasing the invoices. They will want to be confident that these companies have a history of paying their bills.
Factoring is a way for companies to infuse cash into their business without taking on additional debt. By selling their accounts receivables at a discount, they can get money right away without having to wait to collect it themselves. In exchange, the factor is able to make money on the invoices by charging the company a discount fee for their services. One company gets the money they need to continue operating and/or grow their business, while another one has the opportunity to make money by helping businesses grow and prosper.