Invoice Factoring: A Little Know Business Financing Option

Invoice Factoring Group

Business financing is an essential part of business success. While most entrepreneurs are proud to bootstrap their companies and run them as leanly as possible, the reality is that they will eventually need some sort of external financing to grow their companies. Most of the times, entrepreneurs look for financing because their companies have run into cash flow problems. The most common problem occurs because they have to offer term credit to their commercial and government clients. Term credit allows their clients to pay invoices in 30 to 60 days. The problem is that to offer terms, your company must have a cash reserve that can be used to pay for operating expenses. This gives you the money you need while waiting for payments.

This is where most small business owners fail. They don't have a meaningful reserve, which means that they end up overextending themselves. What is worse, this problem hits companies when they are growing the fastest and need funding the most. You can see the irony in the situation.

First step - let's go to the bank

Most entrepreneurs head to the bank at the first sign of cash flow problems. They often think that a business loan or line of credit will solve their problems. What they fail to take into account is that most bank financing products are very difficult to get. Banks and institutions only provide financing to companies that have long track records of success, can provide extensive financial records, and have ample collateral. Most entrepreneurs and small business owners have all their money tied up in their small business and have little, if any, additional collateral. Few meet the criteria for bank funding.

But let's look at the problem. The working capital issues come from the fact that clients are paying slowly. You would not have this problem if clients paid sooner, or if your could finance your invoices. What you need is a financing alternative for companies that can't get a business loan that fixes this problem.

A solution - finance your invoices

The simple solution is to finance your invoices using factoring. This minimizes the problems associated with slow paying invoices by providing a working capital injection while you wait for your customer to pay. This improves your financial stability and allows you to run your business more effectively. And more importantly, it enables you to offer credit terms to clients without fearing cash flow problems.

Is this solution right for your company?

Accounts receivable financing will work for your company if your biggest problem is that your clients are paying slowly and you can't afford to wait. Note that is is not a solution for invoices that are collections problems and won't pay. That requires an attorney or a collections agency. But it is a solution for slow paying clients that have good credit but insist on paying slowly. Also, to qualify, you should invoice for completed work (or delivered products), have invoices that are free of liens, and be free of major tax problems.

How does it work?

Each transaction is often structured individually, but most factoring companies follow a common model. They finance your receivables buy buying them in two installments, called the advance and the rebate. The advance is provided quickly, often the day you submit your invoice or shortly after. It covers about 85% of your gross invoice, though this varies. The rebate, on the other hand, is wired once your customer pays in full. It covers the remaining 15%, less any costs.

Your clients pay on their usual schedule

One important benefit of this solution is that your corporate and government clients still get to pay their invoices on the contractually agreed schedules. There is no requirement that they pay their invoices sooner. This enables you to use this solution to grow your business by adding new term paying clients (here is a case study that shows this). This makes it an ideal solution for companies with solid growth potential and whose biggest issue is slow paying clients.

Rates as low as 1.5% Advances as high as 85% for qualified clients
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USA and Canada

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