Factoring For Small Businesses: Things Worth Knowing!
Small businesses and startups often sell goods and services on credit. To be more precise, this practice is common with most businesses and industries. Factoring, alternatively also known as invoice financing, is one of the simplest ways to get a quick loan against the pending invoices. It is also called ‘accounts receivable financing’ in other words. Here are some of the things you need to know.
What’s invoice financing?
Invoice financing or invoice factoring is typically used for financing cash flow requirements. Your business can get immediate funds against the pending debtor bills, and the entire process is much easier than conventional financing, because you don’t need to wait or complete a long procedure. Also, your assets are safe, and you don’t have to lose your share of equity either. Factoring is mostly used by smaller companies that have limited resources or don’t have a long credit history in the local market. Contrary to what many people believe, factoring is not new form of finance. However, it is not like selling your invoices to a collection agency, because if the concerned debtor doesn’t pay the money, it will add to your loan amount.
How does it work?
First things first, you need find a reliable factoring company. FactoringCompanyGuide.com features a list of factoring companies, or else, you can check online, as well. The concerned professions from the factoring service will evaluate the creditworthiness of your debtors. For example, the debtors who have paid your invoices on time or have a long and solid history of timely payments are considered first. The factoring company will pay an upfront amount in exchange of the invoices, which is typically lesser than your loan. The remaining money will be paid once the debtors have cleared their invoices. In return, the factoring company will charge a small fee. There is no collateral involved in the deal.
Things that matter
Before you can choose a factoring company, do consider their profile. Some of them may work with clients from a specific industry only. Also, you need to know their reputation, besides their background and other details. A good factoring service will consider your business objectives, must explain the relevant documents and will also help in understanding the entire process. They will be extremely clear about the fees and charges as applicable, and there should be no scope for hidden charges. Also, the factoring company must make a commitment for early reimbursement of funds.
Check online to know more!