Companies need to have positive cash flows and be in control of their finances. It’s not enough to just have the funds pay off daily expenses, which some companies don’t even have. Now more than ever, small business owners need to have solid working capital to survive in difficult situations. With today’s unstable and unpredictable global economy, business sectors have become more vulnerable. This process ensures that your customers can pay for the invoices or are creditworthy. Factoring companies prioritize your customers’ financial capabilities and payment history, but they will also conduct their due diligence and check your business and personal credit score. The difference is that they won’t grant you a loan, but they will purchase your invoices at a discount. Similar to banks, a factoring company is a third-party lending institution. You can get immediate cash once you make the sale and sell the invoices to your factoring company through invoice factoring. However, you don’t have to wait until the end of this term to get your money with invoice factoring. Your customers should pay you when the invoice term expires. The duration of the invoice term is normally from 30 to 90 days. After the sale or service is done, you send the accounts receivable or invoice to them containing the amount owed. Here are a few terms that you need to learn to understand better how invoice factoring works: Accounts ReceivablesĬash that customers are bound to pay after you deliver goods or services according to the contract or terms of transaction you and your customers entered into. When your customers pay them, the factoring company will give you the rest of the unpaid balances minus their fee. The factoring company gives you 900,000 upfront. To illustrate this concept, let’s say you have invoices that are worth $1M. However, a factoring fee will be held as payment for their service. You can receive the remaining sum when the factoring company collects the dues from the customers. The factoring company will give you an amount equal to 80%-90%of the invoices upfront. Invoice factoring is a type of financing solution that allows business owners to sell pending invoices at a discount. ![]() Luckily, with invoice factoring, your financing options will no longer be limited. ![]() If you’re unable to meet these requirements it may be difficult to secure critical financial assistance from lenders. These traditional lenders base their loan application approval on your company’s proof of viability, credit rating, capital, yearly profits, and other financial credibility factors.Ī good credit score, at least two years in business, and a stable cash flow increase your chances of qualifying for a loan. It’s no secret that small business owners find it hard to qualify for small business loans from banks.
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