Small businesses that have just started out may be faced with a lot of difficulties particularly when it comes to their finances. Office space, utility bills, salaries of employees, and production expenses are just a few of the things that they have to concern themselves with.
Contrary to the beliefs of other people, starting a business is not as easy as it sounds. It may take quite a while before you can actually start to see money coming in. But what if you don’t have enough cash on hand to finance your business? Will you go for a business loan? Or, is there an alternative?
First of all, what is Invoice Factoring? This allows a certain business company to continue with their operations and activities, as well as to expand or seek new business without worrying about how they are going to pay for the products or services that the business requires.
How does it work?
A business will deliver products and services to a credit-worthy company and sells the invoice to a ‘factor’ – also called factoring company. The factor then pays the business company a certain percentage of the amount that is owed. After which, the invoice is sent to the credit-worthy company. Once the invoice has been paid, the factoring company will deduct a certain amount and give the remaining to the business. The money that is deducted serves as the transaction fee.
What are the benefits?
Invoice factoring benefits both the factor and the business company.
1. Factoring company
The invoice serves as a promise of the client that they will pay for the rendered services or delivered products. With reputable credit-worthy companies, they are somehow guaranteed a good return on investment.
2. Business company
It is the business company’s responsibility to replenish whatever has been used to serve a certain customer in order for them to serve a new one. If they are going to wait for the old client to pay, which can take up to 90 days, then their operations may be stopped. But with invoice factoring, businesses will get the cash upfront. Hence they will be able to carry on their daily business activities.
This is also a good way to control the amount of capital that a particular company receives. This can be used to increase production, which means that there will be more earnings for the company. Furthermore, Invoice Factoring helps increase the purchasing power of a company while improving its credit.