What You Need to Know About Accounts Receivable Factoring
Account receivables factoring is a financing method where you use your invoices and turn them into cash right away. These invoices are categorized in your ledger as account receivables where your clients promise to pay the certain amount stated. For business owners who need immediate cash, this is one method of financing that they can use. They can just find an invoice factoring company that offers this type of business loan and they are the one who will get paid by the customer.
How Factoring Invoices Help a Business
Getting a bank loan might be the best option for most business owners. But if you need the funds really quick like for instance in 24 hours, the best way is to turn to receivables factoring companies. There are so many ways that factoring invoices can help a business. For instance, Sandy owns a repair company that does repair works and services. When there is a new client, Sandy has to buy the necessary supplies and pay the workers to finish the job.
Once the work is done, the company of Sandy will then send an invoice to the customer and payment is made usually within 60 days. When there is a new customer, Sandy has to buy materials and pay for the wages of the workers while still waiting for the invoice to get paid.
If you’re a business owner and you are operating on a small scale, your business’ resources may not be enough to cover all of the expenses to ensure there is a continuous flow of business operation. With invoice factoring, you can take on new customers and get hand of your cash flow.
When Do You Need Accounts Receivable Factoring?
If you have a good credit score, your access to credit is not a problem. You can have many financing options. So, when do you get invoice factoring? The answer actually depends on where you intend to use the money for. When you need immediate cash in order to fund your business growth, this is without a doubt a good option. With factoring invoices, you can have funds for the things you need to buy like supplies or for other expenses like payroll, renovation, etc.
Another reason why many business owners turn to invoice factoring is that this financing option offers fast funding. Invoice factoring companies don’t take that long to approve your application. In only takes hours and you can already receive the funding that you need the same day.
For people who do not qualify for a bank loan, this is a viable option. Even if you have a poor credit score, you can still apply for this type of loan. Why is it the case? Unlike traditional lenders like banks, invoice factoring companies consider mainly the quality of your customers/clients’ credit. After all, they are the source of the invoices or receivables.
What to Consider
When choosing a factoring company, there are essential things that you have to take into consideration.
- Application Process: Before even applying for a loan, it helps that you get to know about the application process. What documents do they need and what are they looking for? There are some factoring companies that actually need lots of paperwork while there are others that operate online. By knowing the application process, you can assess for yourself whether it is convenient to apply for one.
- Factoring Fee: Most companies that offer fast and convenient loans tend to charge higher fees. Search for a company that is transparent when it comes to pricing. Be wary of invoice factoring companies claiming that they offer the lowest rates and then they have other fees that will increase the total costs. Once you notice that the company is not divulging the necessary information that you need, it should be a warning.
This type of business loan should be able to help you address your cash flow problems. Prior to dealing with any loan companies, it is very important to know the kind of service that they give to their clients. There is no point in getting a loan from a company that will cause you problems. Pay close attention to the kind of service that you receive. It is also very crucial that you read online reviews. The company should be Better Business Bureau accredited and has the license to operate in your state.
To have access to financing options and to avoid incurring penalties, you need to have a good relationship with your invoice factoring company. If you know that a client may not be able to pay, do not even attempt to ruin your business relationship with the loan company. You don’t want to end up paying for the whole amount of the invoice plus additional fees.
Invoice factoring is a good solution for businesses that need instant cash and quick solution to address crash crunches and in order to fund business growth.