subject: Business Financing - Should You Opt For Invoice Factoring Or Not? [print this page] Short answer, yesShort answer, yes. Provided that your company meets certain criteria.
Invoice factoring has been gaining popularity as a tool to finance growing businesses. It is a solution that accelerates payments from slow paying clients, freeing up cash flow and allowing companies to grow. Business owners can now feel more confident thanks to factoring, as they no longer have to play the waiting game and cringe at the possibility of delaying payroll or watching the business go stagnant.
But once again, not everybody can benefit from factoring. There are certain conditions that need to be met if you want to use factoring for your business.
It must be established and have commercial or government (not consumer) sales
Profit margins must be no less than 12 percent.
There must be some evidence it is indeed taking your clients too long to pay up.
Provided your business meets the above criteria, then factoring financing would indeed be a worthy business financing solution. It may not be as inexpensive as a business loan, but certainly will be significantly more flexible and easier to obtain.
Factoring will help you if.
You are turning away orders because you lack the cash flow
If you are missing payments such as rent and payroll because your cash cannot quite cover it.
There really isn't much to a factoring transaction. Once you invoice your client, you sell your invoice to the factor, who advances you up to 85% (on average) for your invoice. In the event of disputes or questions, the remaining percentage is held as a security. As the factoring company waits to get their money, you would get your funds within 24 hours. After payment is completed by the client, this would be the time when you would receive the 15% rebate, less the factor's fee.
Factoring costs are not the same across the board, as credit worthiness, industry nature and payment cycles, among others, all can influence this number. Generally speaking, factoring will cost 1.5% to 3.5% per month. To simplify things and make the option more feasible, many factors have started spacing their pricing into ten-day increments. So a factor that charges 2.7% per month, would actually charge you 0.9% for every ten days the invoice is outstanding.
To summarize, invoice factoring, provided you meet the criteria discussed above, is a feasible and still affordable solution to many financial concerns. Qualifying for invoice factoring is very easy, the biggest requirement is that you do business with credit worthy commercial or government clients.
