- July 6, 2016
- Posted by: Admin
- Category: Finance & accounting
You may be looking into your options for gaining cash fast, and you have just come across the term “invoice factoring.” You have probably heard that this is a good option for earning money more quickly instead of waiting on customers to pay their invoices. But you may still be wondering what it is, and how it works. That is what we are here to explain.
If you contact a company that specializes in invoice factoring, you will be offering to sell that company your unpaid invoices in exchange for a lump sum of cash. The company then owns the invoices and will get paid when it collects from your customers. The company will take out a small factoring fee, then gives you a percentage of the remaining upfront. You will get the rest of what you are owed after the company gets paid. The factoring fee is usually between one and five percent of the amount the invoice is worth. This large range depends on the invoice amount, your sales volume, the customer’s creditworthiness and if it is a recourse or non-recourse factor.
If the contract is a recourse factor, it means that you are responsible if the customer ends up not paying the invoice. You may have to buy back the unpaid invoice from the company, or replace it with a more current invoice of equal or greater value. If it is a non-recourse factor, you will no longer have an obligation to replace the unpaid invoice. This option will mean higher fees for you from the factoring company, because they are taking on the risk if the customer disappears without paying the invoice.
Invoice factoring is a way to get your money faster than you would if you were getting a loan from the bank, and it works in a pinch if you have bills to pay and your invoices aren’t getting paid off fast enough. In addition to being faster, it is also easier to apply for than a bank loan and you are more likely to get it, especially if your customers have a good credit history and are considered low risk. If you don’t mind sacrificing some of the amount from the invoice to a different company, there are few, if any, disadvantages to using this system.
What are you waiting for? Contact a factoring company today to learn how you can get started with invoice factoring to get ahead of your invoices and expand your business.