Invoice factoring is very similar to medical factoring; in fact – the latter is a form of the more general. At its root, it is just asset-based financing that, instead of using buildings and equipment, uses your outstanding invoices.
The Mechanism of Invoice Factoring
Here’s the skinny: you find a factoring company that suits your needs and after you qualify for their services, you sell them your invoices. They will pay you a fraction of the total value of the invoices – usually around 80% of the total on the receipts – and then shoulder the responsibility of awaiting payment from your customers. The benefit to you is that you can use the immediate funds to keep your cash flow positive or to effectively meet the daily requirements of your business. Later, after between 30 days and 120 days, once the factoring company collects the entirety of the payments that are due, they will subtract their fee from the 20% remaining before sending you the rest.
Who Benefits From Invoice Factoring?
Although any business can potentially benefit from this, usually SMBs (small to medium-sized businesses) find invoice factoring services most favorable. With large companies, it can get very expensive; additionally, their cash flow reserves do not fluctuate nearly as much and they possess many more sources of income than SMBs.
Do You Qualify for Invoice Factoring?
There are several minimum but standard requirements. First of all, you need to demonstrate that your clientele is professional/creditworthy. If the majority of your clients are overseas, for example, this could reduce the invoice factoring companies for which you qualify. You also have a record unladen with liens and prior adverse judgments. The final general requirements revolve around the invoices, themselves: are your invoice practices solid? You of course have to have the invoices in your possession, and not be a middleman for another company.
For more information on factoring, please check out the Means Commercial Capital blog; we have finance and business experts available to meet your needs.