How Invoice Factoring Works
Cash Flow Solution
There is an answer to your business cash flow difficulties and it's called invoice factoring. When bank loans are hard to get, your credit cards are maxed out, and your vendor credit lines are at their limit, factoring is a great way to get much needed cash in a hurry. When you understand how invoice factoring works, you'll be amazed that you haven't used the process before.
When you generate invoices to customers, you are extending credit, and you are accepting a promise to pay. Many times, even good customers can have problems, and they may break their promises. If you're expecting a $10,000 invoice to be paid on time in order to free up cash for your payroll, you may have a significant problem if that money never arrives. If you contract with a invoice factoring company, the factor will buy your invoices and pay you very quickly--sometimes even within 24 hours.
Factors will typically pay 80 to 90 percent of the value of an invoice immediately, and will send the balance to you when the customer pays in full. They will deduct their service charge from your final payment.
What Do I Have to Prove?
You have to show that the goods or services you have provided were received and/or accepted in good order by your customer. Any issues have to be successfully dealt with before you submit your order for factoring. Your factor may have a special form for you to fill out for each invoice you submit.
What Do the Terms Recourse and Non-recourse mean?
An invoice factored under a recourse plan means that if the customer does not pay, the business is responsible for reimbursing the factor for any money advanced. The factor is totally responsible for a non-recourse invoice, and if the customer does not remit, the business owner is held harmless.
You're in business to make money and so is your factor. Therefore, factors commonly charge a small percentage of each invoice as their fee for advancing you money and keeping track of the invoice they now own.
My Credit is Not Perfect
You already know that banks have seriously tightened their credit requirements. If you've tried to get a mortgage lately, you also know the difficulties involved in that process. While factors may not automatically approve every company, they do understand small business, and most will do everything possible to help you get paid.
You work extremely hard every day to get your product in the hands of your customers, and nothing is more disconcerting than having to wait forever for payment. If you're worried about cash flow, investigate how factoring works to help even it out.