For small business owners, it is not that easy to secure a loan, especially when you need instant cash to fund growth or fill in the gap in your cash flow. Traditional lenders can be quite strict when it comes to securing a business loan even if you have good credit standing. That is why many businesses turn to invoice factoring companies. Over the years, this has become a widely popular financing option among businesses, especially small and medium enterprises. So, what makes it a viable financing option?
Invoice factoring is also known as invoice financing or receivable financing. Businesses who sell products or services to their clients will issue an invoice. It will then take a few weeks before the client pays for the invoice. Business owners can loan these invoices through factoring companies in order to have fast access to funds. You do not have to wait for weeks to get the money.
With invoice factoring, you get to have the funds that you need for your business. It is very useful to boost your working capital so you can grow your business. This type of business loan might be a bit more expensive compared to other financing options. But it gives you different advantages that you cannot find in traditional loans.
There are three parties involved. First is the business owner who issued the invoice. The other parties involved customers and the financing company that will provide funds for the unpaid invoices. Once the business delivers certain products or services, they will issue an invoice. To get the funds, these business owners sell their invoices to the factoring company. The business owner will then get around 70% to 95% of the value of the invoice.
In getting an invoice factoring, there are various advantages that you can get:
Compared to other types of financing loan, invoice factoring actually has fewer disadvantages. Of course, the rates may be slightly higher especially since factoring companies compared to traditional banks. But at least you don’t have to use any asset as your collateral. If you need quick funding, this is a good way since you use your invoices as your collateral. However, you cannot also avoid any problem that may occur. For instance, if the client who needs to pay your invoice on time is a late payer, then it can be a big problem.
Now after weighing your choices and you have finally decided that this is the best financing option for you, how do you choose an invoice factoring company?
Your choice as to whether you will go for an invoice factoring company or to another lender will actually depend on the different financing options that you have as well as your needs. If you are in need of quick funding and you have a poor credit score, invoice factoring might just be the best option for you.