Invoice Factoring
Invoice factor loans are easy for both new and well-established businesses to get. The requirements to qualify are minimal and easy to meet.
What is invoice factoring?
Invoice factoring loans are the easiest source of funding for small businesses as the qualification procedures are very easy. Funding is made available within a week.
Invoice factoring, or invoice financing, is increasingly becoming more common. So what is it and what is it for? Invoice factor is a way to make an income out of your outstanding invoices as soon as you want the cash. For example, if you have invoices that are outstanding for 60 days, then you can “cash” them in advance as the invoice factoring company waits for the invoice to mature.
The invoice factoring company will pay a business at least 80 percent of what the invoice is worth, and then the other 20 percent will be paid after the maturity of the invoice. The invoice factoring company will deduct its fees from the final 20 percent.
Benefits of invoice factoring
Low Interest Rates
The interest rates are usually low, starting at 0.5% per week.
Credit Score
There is no need to have good credit.
Fast Funding
The funding time is faster than for a traditional loan.
Collateral
The invoice is the collateral.
It is not the same as invoice financing
Invoice financing is slightly different from invoice factoring. With the former, a business will borrow money with the collateral being the payments that are expected from the customers.
No need to wait for customers to outstanding invoices.
Instead of waiting for customers to pay outstanding invoices, which could take a while, a business gets this loan to carry on with other operations of the business.
80% upfront and 20% later.
In invoice factoring, a business sells its invoice at a discount to the invoice factoring company in two installments, that is, 80% upfront and 20% later.
Who is invoice factoring best for?
This is best for small business that are in B2B or that work with the government. However, today most invoice factoring companies are working with B2C businesses. If you do not invoice your customers, start invoicing them from now going forward, as you can see that someday you could sell pending invoices for instant cash to fund the operations of your business.
Any business that invoices its customers can get invoice factor funding. However, this is just a short-term fund source for your business. This is best when you are going through the slow season.
Any business, whether it is small, big, new or well-established, can get financing from invoice factor companies as long as the factor establishes that indeed the customers are able to pay. Even when you have barely been in business for a year, you can still apply for this advance and get it because the invoices are practically the collaterals.
How does invoice factoring work?
Firstly, you must issue an invoice to your B2B, B2G or B2C customers with the requirement being that payment must be settled in 90 days. 90 days is the basic requirement for invoice factor loans, so anything lesser than that will just not be considered.
Secondly, you will find an invoice factoring company and sell them the invoice. To do this, you will have to submit an application to the factoring company. Sometimes they will be willing to advance you the money, but sometimes you may have to apply to a few different companies before you get accepted. Applying also means submitting your invoice, and then the factoring company will decide whether you are worthy of getting the loan.
One of the things that the company considers is just how likely your customers are to honor their commitments. If they decide that the customers are diligent, then you (the borrower) and the factor will sign an agreement in regard of how much money you will be advanced.
The borrower or the factor will then have to send notices to the customers that the invoices have been assigned and that the factor is going to receive the payments due from the invoices. The factor then sets up lockbox accounts where all the payments for the factored invoices will be going.
Important factors for borrowers
A few things could prevent the invoice factoring deal from going through. If the factor finds out that there is a charge back or that disputes could arise from the invoice, well, they are not going to advance the loan to you. If the customers who are expected to honor the invoices are creditworthy, then you should have no problem qualifying for the loan.
The time to qualify differs from one company to another. However, generally you will know whether the application has been accepted or rejected within a day or two. The fees are not high because the discount rate is usually anywhere between 0.5% to 5% and you are allowed to borrow more than $10,000 a month.
Just as it is with other types of business loans, there is no rule of thumb even with the invoice-factoring loan as requirements can differ from provider to provider. However, the most important thing to note is that this is the most accessible type of loan for startups, business owners with bad personal credit and so on.
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