What is Invoice Factoring ?
Do you know what’s ironic? It’s when you have lots of funds in a form of invoices waiting to be paid by your customers while you don’t have enough cash flow to pay your staff salaries, suppliers, and many other company bills. If you don’t come up with a good solution to get a quick funding, such problem could put your business to a halt and potentially causing you to lose new clients.
Such case often happens to small businesses, especially during the times when the economy is slowing down, that forces people to spend less as well as affects their ability to pay their debts on time. Larger businesses usually have their own risk-management system that could help them monitor and maintain their cash flow even in the hardest times. But for small businesses, it could be a disaster. They might have to downsize their staff, sell their assets, or even worse, they might lose their businesses or have to declare bankruptcy.
Invoice factoring is a form of working capital funding that can help businesses maintain their cash flow and get the funds that you need to run your business. With invoice factoring, the lender company will advance up to 80% (or more, according to the company’s policy) of the value of one or several invoices your company has issued. Mostly the approval process is really easy and quick, you simply need to give the lender copies of invoices yet to be paid by your customers and when it’s approved (usually only takes a few hours), you’ll receive the money in the next business day.
So basically the business is selling its invoices to the lender company at a discount price in order to get a quick cash flow. The lender company then will be responsible to the debt management, which includes collecting the debt from the debtor. This type of working capital financing is mostly used by industries that have large accounts with their clientele as well as suppliers, such as manufacturing, supply chain for retail, and real estate.