For a small business, maintaining a steady flow of cash can be a challenge. Even if you eventually get a significant new contract, you’ll still need to find money to pay your employees’ salaries and purchase company supplies. Funding may be difficult, particularly if your new customers fail to pay their initial invoices promptly and income is delayed.
When in a crunch, many business owners turn to their bankers for assistance. However, obtaining a bank loan to bridge the gap between services rendered and bills received is difficult. To be realistic, it’s not something you will usually do. On the other hand, those who do provide accounts receivable loans are generally very costly. Another option is to use a credit card. However, if you don’t have the funds to pay off the amount, the fees and interest make it a wrong choice. Because of this, it makes accounts receivable factoring a viable solution.
What Is Accounts Receivable Factoring?
Accounts receivable financing, often known as invoice factoring, is not a loan and therefore does not affect your credit. On the other hand, invoice factoring is a financial solution that enables company owners to leverage upcoming revenue to get the money they need now. It occurs when a company sells preceding invoices that are subsequently payable to a third-party firm. The third-party company is a “factor,” and it pays companies immediate cash or bills with future due dates corresponding to a fee.
Factoring enables companies to obtain an advance on the money due to them by their clients. It provides companies to fulfill their immediate financial commitments, providing a flexible, low-risk option for cash-flow problems. Both sides must sign a factoring agreement or a contract between a factoring services provider and a business to move forward in the transaction.
How Does Invoice Factoring Works?
The factoring company purchases your client receivables and then promptly pays you, typically on the same business day. Because a factored invoice is not considered a loan, your business incurs no additional debt. Based on a typical factoring agreement and proced