One of the most difficult things about being in business is cash flow, but invoice factoring may provide the means necessary to keep the business flowing. After all, you need a certain amount of cash on hand at all times. But what if you have a stack of invoices that just haven’t brought in the cash yet? You can’t afford to wait until those customers decide to pay you. If you want to be successful, you’ve got to charge on-even if you don’t have cash on hand.
This may sound impossible, but there are solutions for businesses that have a cash flow problem. Invoice factoring is one of the easiest ways to keep the cash flowing even though your invoices remain unpaid. Here’s how it works. You receive quick cash based on that stack of invoices. It’s quick and easy. The invoice factoring company simply buys your invoices and gives you an advance payment to tie you over until your customers actually pay. Their payment then goes straight to the invoice factoring company. If it sounds too good to be true, then it helps to understand more about the process.
Here are some tips to help you use this financial vehicle successfully:
• Most invoice factoring is done in two installments. The first one is basically an advance, and it is given to you when you hand over the invoice to the financing company. The second payment, which is also known as the rebate, is given to you after your customer pays the invoice.
• Advance payments can be anywhere from 60 to 90 percent of the gross value of the invoices, with 80 percent being about average.
• With this form of creative financing, you get paid immediately rather than having to wait one to three months for your own customer to pay you.
• The cost of using this service depends on three components. The credit level of your customers is one component, and the amount of time it takes for your invoices to get paid is another. The third component is the monthly factored volume.
• Usually you will pay anywhere between 1.5 percent and 5 percent for each transaction you make.
• Businesses that are growing quickly can especially benefit from this form of financing because it enables them to get the cash flow they need quickly to keep up with the rapid pace of orders coming in.
• Invoice factoring is different than a bank loan because most banks will not give you a loan based on the stack of unpaid invoices you have. The focus is instead shifted to how much credit your customers have rather than how much credit your business has.
• It’s helpful to have insurance against fraud and / or requiring your customers to be audited. This will help reduce the risk of using this type of financial solution.
• When choosing a company to handle this part of your financial affairs, choose one that is knowledgeable about the laws regarding it.