Invoice financing is usually a better option for businesses that are looking to maintain as much control as possible, while factoring works better for those that don’t mind giving up a little bit of control for a lot more flexibility in the funding they receive. The major difference between these two forms of financing is that you maintain a lot of control over your invoices with one option (invoice financing) but have to repay the entirety of that loan upfront – plus interest – just like you would with a traditional loan package. If a factoring company cannot successfully collect on your invoices they may have an opportunity to compel you to purchase the invoices back or replace them with one of greater or even equal valueĪre invoice factoring and invoice financing any different?.A factoring company may look to verify the overall credit worthiness of the clients and customers you have outstanding invoices with to determine that these invoices are worth purchasing themselves.You do lose some direct control over your invoicing, as the factoring company has the option to contact/collect on the invoices directly while cutting you out entirely.Invoice factoring can get very expensive in a hurry, particularly if you haven’t closely read the fine print to discover any of the potential hidden fees that can be tacked on to these packages.No real collateral needs to be provided upfront to lockdown these financing packages.Almost effortless approval thanks to the security provided by your invoices.More predictable cash flow than what you might get with variable payment terms with customers.Working capital you can use to cover expenses and to leverage new opportunities.Almost instant cash flow for your company to use how you see fit.That means you receive $8245 upfront as soon as you decided to move forward with factoring organization, with another $1455 in cash sent your way when the invoice has been paid to the factoring company from your customer. Let’s also say that the factoring company provides 85% of invoice values upfront (less this fee, of course). Instead of waiting up to 30 days for your $10,000 you instead turn around and sell that $10,000 invoice to a factoring company, and let’s say that the company has a 3% fee charge across the board. Let’s say that you own a local manufacturing organization, and a customer purchases $10,000 worth of merchandise from you with a payment period of 30 days after the invoice has been received. The invoices themselves act as a security for these kinds of financing packages, making them attractive to both entrepreneurs and the lenders that provide them. This is a popular form of financing for small business owners because it not only helps them get quick cash when they need it most (rather than waiting between 30 and 90 days for customers to pay these invoices), but also because they do not have to worry about having sterling silver credit scores, credit history, or even any real credit at all! In this exchange, the factoring company becomes the owner of the invoices that they have purchased – getting paid directly from the customers that had these invoices outstanding (usually inside of between 30 and 90 days). In exchange, the factoring company provides a lump sum of cash that can be used to build and grow a business however the small business owner sees fit. This is a straightforward process whereupon a business owner sells the invoices that they have to a factoring company. While invoice factoring isn’t specifically a loan in the traditional sense, it is a form of financing – a secured form of financing, at that. What Exactly Is Invoice Factoring, Anyway? Thankfully, modern and nontraditional financing options – like invoice factoring – provide small business owners an opportunity to leverage one of their most valuable assets into predictable and consistent cash flow to build, to grow, and to leverage new opportunities. According to the Small Business Administration, nearly 80% of the businesses that full inside of five years say that an inability to get the financing they needed was a major cause behind their decision to shutter their business forever. Small businesses, particularly those started by first-time entrepreneurs, regularly bump into trouble getting traditional financing. Cash flow is king when you are operating a small business, but any small business owner will tell you that having consistent and predictable cash flow is anything but simple and straightforward.
0 Comments
Leave a Reply. |