The Facts of Factoring

Instead of waiting around to boost your business financially, why not put your unpaid invoices to work and secure some much-needed funds? Factoring provides such an opportunity – keep reading to find out how.

What It Is

Also known as invoice factoring, this is a way for businesses to obtain funds by selling their invoices or accounts receivable to a third-party company (known as a “factor”). In particular, it’s used by small and medium-sized companies which may not meet certain qualifications required by other types of traditional financing methods. For example, you might not have many years of business experience under your belt yet or you might be lacking in strikingly high credit scores – yet you can still qualify for factoring if you have enough redeemable invoices. You can then utilize the money to increase cash flow during slower seasons throughout the year or you can put the money to use as working capital to pay for everyday expenses such as paying your employees. Finally, you can use the funds to support business growth, for instance, when you need some extra cash to add a new product or bring on additional staff.

How It Works

First, you’ll start by choosing your lender. Be sure to carefully compare fees between different companies and examine their information regarding what they offer to you and what they require of you. When you’re ready to apply, you’ll be asked to provide basic information about your business and then you’ll send in your invoices for approval. When it comes to this step, consider both quality and quantity: You’ll need to make sure you have enough invoices to obtain the amount of money you need and they should also be from reliable customers so that your third-party can trust they’ll receive their payments when they’re due. The company will review your application, check customer credit ratings and examine your business’s potential to grow and fulfill its obligations. Once you receive approval, the company will advance to you a percentage of your invoices’ value (which can be from 70% to 95%), and then they’ll forward you the rest (minus any lender’s fees) once your customers have paid their debts. Your lender will collect your customers’ payments, and in some cases, even help you with bookkeeping and other tasks so that you can focus on what you do best.

Obtaining funds by making the most of your unpaid invoices could be the next step to a thriving business.