How does invoice factoring work? By factoring invoices, a business with limited cash on hand can stretch its budget using its accounts receivables or unpaid invoices. Why is factoring efficient? Usually, a business must wait for 30 to 60 days before a customer sends in complete payment for the products he received. These unpaid invoices freeze your business fund.
To free up your frozen funds, a business can acquire the services of an accounts receivables factoring company to get the cash advance he needs. In exchange for his invoices, a business can receive at least 60% to 90% cash advance from the amount of invoices he will submit. In other words, factoring is selling your invoices to a lender.
If your application is approved, your factoring company would take over the collection of payments from your customers. This way, instead of waiting for your customer's payment, your factoring company would do the waiting. As soon as your customer pays off his invoices in full, you can receive the remaining balance from your invoices. However, if your customer fails to send in his payment on time, your factoring company would be keeping the rebates as its service fee. This arrangement benefits both the business and the factoring company.
The important thing about factoring invoices is to choose a reputable and trusted factoring service provider to partner with. You should also submit invoices only from your most trusted customers. If you customer has proven to be a good and timely payer, you lessen the risk of losing your rebates to your factoring company.
Are the requirements strict? Not at all. Most factoring companies require businesses to be at least 2 years in active existence. The good news is, credit history is not a requirement at all. This is why invoice factoring or accounts receivables financing is a very feasible option for any type of business.
