Companies that face a cash-flow challenge in addition to having slow-paying customers can sell their account receivables or invoices to invoice funding companies also known as factors. Invoice factoring services are increasingly becoming popular since the factor can advance amounts of up to 90% based on the creditworthiness of the customer who was billed. When the billed customer pays the bill, the money factoring companies remits the balance but deducts a transaction fee also referred to as factoring fee. Many businesses prefer using invoice factoring services as they can access money in less than 24hrs as opposed to having to wait for up to 60 days after payment.
Most startups prefer using business factoring services to get advance business capital. The banks on the other hand take into consideration the creditworthiness of a business before issuing a loan while the factors analyze the financial soundness of the customer. But factoring can be quite expensive as opposed to the conventional lenders. Regulated under the international factoring association, some industries require massive capital input. These are mostly businesses in the freight and logistics services. Factoring was once considered as a controversial source of financing because of its original ties to the garment industry. There is also a misconception that a business uses invoice factoring services because it cannot deal directly with banks.
There are billions of dollars that flow through invoice funding companies in form of account receivables annually. These invoices are mainly from freight, construction and health industries. Some of these companies use advance business capital factoring to close the cash flow gap. There are other companies that view business factoring services as more viable compared to bank lending that require a lot of paperwork. It is important to note that factoring is less likely to be economical for firms that send out small denomination invoices as the factoring fees may be charged on each invoice because of the risk involved.
Companies that may wish to expand overseas can use an international factoring service under the international factoring association. International factoring means increased risk hence the reason why the international factoring association was created. Using these services, overseas purchasers and suppliers can transact business much more efficiently and with little effort. In most cases, companies wishing to expand access immense benefits from factors. This is because; an expansion strategy requires a lot of capital-capital that may not be available to the company at the time of growth.
Factors can easily access these companies’ funds and the company has endless opportunities in terms of how they grow as there is ready capital to hire new staff and buy new equipment if necessary. There is also the aspect of a mixed line of credit. Conventional lenders follow strict guidelines on their lending procedures in addition to putting a cap with regards to the amount of funding that a business can acquire. Factoring services on the other hand only limit the funding on your account receivables.
Considering that there are There are nearly 28 million small businesses in the U.S, bank turn-downs are probably one of the main reason why business either fail to grow or become fatal for business. However, factoring services rarely turn their procedures into a bureaucratic nightmare for startups. Even businesses with scanty credit history can still access funds as long as the accounts receivables reflect the financial soundness of the customer.