When you write an invoice, your customer technically owes you a debt. This isn't a debt in the traditional sense, but the customer still owes you money. Because of this, the accounts receivable amount can really hamstring your business until it's paid. With invoice financing, you can receive an advance on the invoice from a funding company before you get paid by the customer. The funding company gives you an advance, usually between 70%-90%. The funding company waits for the debtor to pay the invoice and takes a small cut, usually between 1-4%, then rebates the remaining amount to your business.
Dealing with accounts receivable is one of the biggest challenges for many small businesses. Even if a company does well with its sales, success is limited until it collects the money owed to them by their customers. Here are the most common reason businesses use factoring:
With an accounts receivable factoring arrangement, you are essentially going to turn over the account to a factoring company. In order to get the process started, you fill out an application and give it to the company. They will then assess the credit worthiness of the customer and determine if they are a solid credit risk. Once they are approved, they'll forward you an advance on the invoice. At that point, the account is basically handled by the financing company. They start sending statements to the customer and calling them to collect. If the customer doesn't pay their bill, it's the funding company that handles the process of collections.
When you work with a factoring company, there are a couple different options that you have to pick from. You can choose either a recourse or a non-recourse advance. With a recourse advance, the company can come back after you if the customer doesn't pay his bill at some point in the future. By comparison, with a non-recourse arrangement, you don't have to repay the advance if the customer doesn't take care of the balance. This means that with a non-recourse advance, all of the risk is transferred to the factoring company. Because of this, non-recourse advances typically have higher fees and interest rates associated with them. You'll have to determine if giving up more of the profit on your invoice is worth the option to transfer the risk to the funding company.
The biggest advantage of using this type of arrangement is that you can improve your cash flow in a big way. You don't have to worry about when the customer is going to pay you and you can focus on the things that are actually important to your business. You can get the money right away when you get everything finalized with the factoring company.
Another big advantage of factoring is that you don't have to depend on your credit to get you the money you need. The factoring company doesn't really pay attention to your credit because you aren't the one paying the bill. The customer who is on the invoice is the one who is going to be responsible for paying the bill. This opens up your opportunities in a way that traditional financing cannot. You don't have to have perfect credit. You don't need a long business history with a strong monthly income. This makes it a very intriguing option for businesses who might not be able to get approved for a traditional loan or line of credit.
If you're thinking about trying out accounts receivable factoring, it's important to make sure that you find the right deal. There are a lot of different factoring companies out there and all of them offer something a little bit unique. One option that you might want to look at is CBAC Funding. At CBAC Funding, you can actually get factoring companies to fight over you. You get on the website, fill out some information, and then you sit back and wait on the factoring companies to send you some offers. This means that you can often find the best deals available to you, because you immediately have access to a wide range of offers.
Once you locate the best deal, it's simply a matter of filling out some paperwork and getting the ball rolling. Then you'll have access to the funds that you need to run your business successfully. Be sure to read the fine print on each offer so that you know exactly what you're getting into.