subject: How Invoice Factoring can be Used Like a Line of Credit [print this page] Most businesses will need financing to succeed. One of the most used forms of business financing is the line of credit. A revolving line of credit can be drawn upon when needed for working capital. Companies use the credit facilities to manage the ups and downs of cash flow. Lines of Credit are typically secured by business assets and offer competitive interest rates for those who qualify.
Unfortunately, lines of credit are no longer very accessible to most small business owners as they are now subject to very stringent underwriting by banks. Most banks now require that the business has strong profitability and lots of assets. Often the only companies that qualify for the traditional line of credit really don't need financing.
There is alternative to the line of credit that has been getting more common since the banking crisis. It's called invoice factoring and simply put it's a financing tool that is directly ties to your sales in which you provide credit terms. Factoring allows you to get a cash advance on your net 30/60 invoices, eliminating the cash gap and providing immediate liquidity to cover company expenses and take on new projects. Since factoring is based on your sales it also grows as your company sales grow. This makes it a great source of funding for small companies that are in a growth stage.
The factoring process is quite simple. You continue to invoice your customer using traditional net 30 or 60 terms, but you get an 80% to 90% advance from the factoring company. This provides predictable cash flow, which should allow you to operate more effectively. You get the remaining 10% to 20%, less a discount fee, once your customer pays the invoice. Most factoring discount fees range from 1% to 5%, depending on the how the deal looks overall.
Factoring will not make sense for every business, but it's a great cash flow solution for companies need to cover operating expenses and growth. If your company does not qualify for a revolving line of credit, then factoring invoices may provide your financing solution
How Invoice Factoring can be Used Like a Line of Credit
