subject: How Invoice Factoring Can Help Your Business [print this page] One of the major challenges that any business owner faces is the delay between customer payment and company expenses. While large businesses can absorb the temporary loss, smaller business are unable to cope with the delay. Not only can a postponed payment affect the company's ability to expand and make new purchases, it can even affect payroll and everyday bills. If a number of orders are not fulfilled, these issues can exacerbate to the point where the business can no longer function.
Invoice factoring is a financial tool which solves this conundrum. By turning in company invoices for an immediate cash payment, a small business owner is able to continue business operations without delay. Invoices from clients with strong credit serve as excellent collateral. While most banks will not offer loans on business invoices, factoring companies specialize in providing financing based on commercial credit. This makes invoice factoring the ideal vehicle for small to mid-size companies, as well as firms with large payrolls.
In contrast to banks which lend money against physical collateral, an invoice factoring business will buy your invoices outright. The factoring company will then provide you with the financing while waiting for payment from the client. This funding can vary between 60 to 90% of the invoice amount, depending on the credit rating of the client. On average, a company will receive an advance of 80% on their invoices. Once the client delivers the payment, the factoring company will send the remaining balance. This remaining installment is called the rebate. This process can be repeated with every invoice, giving business owners flexibility to expand and grow.
When the remittance is paid, the factoring fees are deducted from the rebate. The amount of the factoring fee is determined by three separate criteria: the credit rating of the client, the time required for the invoice to be paid, and the monthly factored volume. The total fee for the business owner, referred to as the discount, ranges from 1.5 to 12 percent per transaction. Generally, using factoring is ideal for small to mid-size companies that are looking to expand and have a healthy profit margin.
