Maintaining a steady cash flow is vital to the success of any business—you need cash on hand to purchase inventory, meet payroll and market your business to name just a few of the many needs of your business. If you are experiencing issues with your cash flow, invoice factoring may be a possible solution to your problem. Here are some frequently asked questions about this service.
What is Invoice Factoring?
Invoice factoring is a very simple, straightforward process that is designed for companies that extend credit to customers. Factoring companies purchase your receivables and you get a immediate cash infusion—the products or services must have already been delivered to quality. For any invoices that have been factored, your customers will be responsible for making payments directly to the receivables funding company. If you receive any payment for invoices that have been factored, do not deposit this money.
You can typically factor invoices of any amount, but companies will have requirements regarding the payment history of the client—in most cases, they must have demonstrated six consecutive months of timely payments. You may also be able to factor invoices of new clients immediately and the companies will evaluate this on a case by case basis.
How is Factoring Different from a Bank Loan?
Factoring is not a loan—you are not taking on any debt. In deciding whether to give you money, a bank will look at your company’s profits, equity, debt, cash flow and how long you have been in business. Factoring companies are looking at the creditworthiness of your customers. They are not giving you a loan, they are purchasing your receivables for a discount. Bank loans can also take months to get approved, while factoring companies can get you your money within a few days.
How Long Does it Take to Get the Money?
The factoring process is pretty straightforward and quick. Applications are typically reviewed within three to five business days. Once your account has been established, companies typically pay out funds on factored invoices within 24 to 48 hours.
Isn’t Factoring Only for Struggling Companies?
While many companies may turn to factoring when faced with a cash flow crisis, this service is not just for businesses struggling financially. Any company that extends credit to customers may benefit from getting money immediately that would otherwise be tied up in receivables—money that can be used towards the activities required to keep your business flowing smoothly and generate revenue.
Kelli Cooper is a freelance writer who blogs about all things business.