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Understanding what invoice factoring is and is not

Posted by Gil Oliva on Tue, Mar 26, 2013 @ 05:16 PM

Understanding Invoice Factoring 

Even so-called cash businesses sometimes establish charge accounts for larger customers, and these can lead to delayed and diminished daily cash flow. Add a few holiday closings and a slew of bad weather, and your business can find itself in a cash bind. Your employees will still expect their paychecks and your vendors will want to be paid. In the past, this situation was more easily remedied as you could simply go to the bank and request a business line of credit. If your finances were basically in order, your friendly banker would help you. Unfortunately, that's not the case anymore.

The 2007 Hangover

The effects of the monetary crisis and the subsequent recession that began in late 2007 are very much with us today. In fact, many economists have predicted that it will be a full 10 years before our economy returns to anything that can be called normal. Until that happens, money for your business will be hard to find.

The Usual Sources Are Gone

While in the past, you were probably able to fund your cash flow shortages by maxing out your credit cards, finding unsecured loans at a finance company, or even by borrowing from relatives, today, all of these alternatives for cash are much more difficult to turn into fruition.

What Is Invoice Factoring?

If you do have a good number of customers who pay by invoice, or even if you've just granted credit to a few large and key customers, the factoring process can help you now. Invoice factoring companies, commonly called factors, simply offer to buy your invoices for cash. They'll advance you 80 to 90 percent of a particular invoice very quickly--sometimes in as little as 24 hours.  The debt then belongs to the factoring company, and they will collect the total amount due from your customer.  You'll receive the remaining balance when your customer pays the factor. The factor will deduct a small percentage form every invoice, and that's how they make money.

Is Invoice Factoring Predatory Lending?

Absolutely not. Remember, if you take credit cards, the processor takes their percentage up front, and they may take up to three days before they send you the money. Factors don't take a percentage of your total sales--only a small percentage of each invoice they've paid you for.  There are no interest charges, and a good factor will not add a plethora of fees. Factors will always spell out all charges and fees before you sign a factoring agreement.

Some businesses use factoring to solve a short term cash flow problem, while others use the service to consistently even out cash flow. Regardless, the system can do wonders for the health of your business.

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Topics: About Invoice Factoring

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