Cash flow is the biggest requirement of a business to meet various short term obligations. If it fails to flow, the growth process of a business will come to a standstill. Companies wait on their customers for cash for 15, 30, 45 days or more. In between this waiting period, businesses might need significant funding to meet payroll and other expenses. To resolve this issue, a firm can liquidate its receivables into ready cash; this is called factoring or invoice discounting. Factoring is a practical and useful alternate financing option that can free up the internal resources of a business.
When the economy shows signs of sluggishness, it has a direct impact on the lending market. As a result, credit for business dries up since banks are reluctant to give loans and reject most of the applications citing poor credit history and low profit margins etc. This may lead to a severe financial crunch among smaller businesses as they usually don't have high cash reserves. Companies that are not ready to face such financial turmoil may find themselves on the verge of shutting down. In this scenario a business needs a creative financing method, that's where factoring comes into play.
A reputable factoring company typically pays up to 90% on an invoice as an advance amount. Principle factoring companies provide direct financing from their own capital. The company then waits to collect payment on the invoices, and once it is collected, it takes out a discount fee (typically between 2.5% and 7.0%). After receiving an advance amount, companies that use factoring can make payment on their short term obligations.
Here are some of the key benefits factoring or invoice discounting provide to businesses:
1. Factoring is actually a selling of invoices; it is not same as lending. Hence, there is no liability for a company to pay back;
2. Funding companies take the responsibility of collecting on invoice amounts from their customers;
3. Factoring companies evaluate every invoice purchased by checking the creditworthiness of customers. Due to this, possibilities of collecting a valid invoice are quite high;
4. Businesses can invest for their expansion plan with increased working capital;
5. Businesses can offer extended payments to customers to consolidate business relations;
6. Profit margins will improve along with better buying power.
Factoring allows a company to realize a major portion of its revenue immediately by selling its invoices. It is a practical alternate financing option considering the current economic scenario. So, the next time you face difficulties in meeting business obligations, perhaps factoring or invoice discounting can tide you over by providing instant cash.
When the economy shows signs of sluggishness, it has a direct impact on the lending market. As a result, credit for business dries up since banks are reluctant to give loans and reject most of the applications citing poor credit history and low profit margins etc. This may lead to a severe financial crunch among smaller businesses as they usually don't have high cash reserves. Companies that are not ready to face such financial turmoil may find themselves on the verge of shutting down. In this scenario a business needs a creative financing method, that's where factoring comes into play.
A reputable factoring company typically pays up to 90% on an invoice as an advance amount. Principle factoring companies provide direct financing from their own capital. The company then waits to collect payment on the invoices, and once it is collected, it takes out a discount fee (typically between 2.5% and 7.0%). After receiving an advance amount, companies that use factoring can make payment on their short term obligations.
Here are some of the key benefits factoring or invoice discounting provide to businesses:
1. Factoring is actually a selling of invoices; it is not same as lending. Hence, there is no liability for a company to pay back;
2. Funding companies take the responsibility of collecting on invoice amounts from their customers;
3. Factoring companies evaluate every invoice purchased by checking the creditworthiness of customers. Due to this, possibilities of collecting a valid invoice are quite high;
4. Businesses can invest for their expansion plan with increased working capital;
5. Businesses can offer extended payments to customers to consolidate business relations;
6. Profit margins will improve along with better buying power.
Factoring allows a company to realize a major portion of its revenue immediately by selling its invoices. It is a practical alternate financing option considering the current economic scenario. So, the next time you face difficulties in meeting business obligations, perhaps factoring or invoice discounting can tide you over by providing instant cash.