What Are the Benefits of Invoice Factoring?
Invoice factoring refers to a financial agreement, whereby the borrowing firm sells its customer invoices to the lender. The amount, the interest rates, and other loan terms depend on the type of business and the nature of the invoices. This financing method is increasingly popular, due to the many benefits it offers. Some of the notable benefits are listed below.
Facilitates Business Growth
Invoice factoring supports business growth in many ways. Firstly, it allows a business to focus on new customer acquisition and retention methods, instead of spending all of their time and efforts following up with debtors. Secondly, it helps the borrower clear urgent expenses, such as paying suppliers. Thirdly, some factoring companies provide advice and recommendations that are specific to the borrower’s business. The advice helps the business to understand more about market uncertainties, as well as the health of the business’s invoice accounts and its debtors. Moreover, factoring allows for quick payment disbursement; it saves companies from having unpaid expenses or a lack of cash needed to cover immediate expenses or purchase more inventory–all of which might result in the closure of their business.
Improved Cash Flow
Traditional loans take an extended period of time, typically 60-90 days from application to disbursement. However, companies that use invoice factoring can acquire the cash within as little as a few days. The short period helps the business to clear their expenses and more easily regulate their cash flows.
Fewer Application Requirements
Factoring firms require a less stringent application process. Unlike banks, factoring firms will loan to businesses with poor credit. This is possible because the factor focuses on the customer’s credit and payment history, not the business’s or owner’s credit. If most of your invoices are from customers who have a solid credit history, you are in great shape to be considered for a factoring loan. Collateral is also not a significant requirement, since the factor purchases the invoices as collateral.
Traditional financing options through most banks restrict the borrower on how they are able to utilize the loan. Invoice factoring, however, does not have restrictions. As long as the money is used for business purposes, you may use the money to purchase business assets, pay bills and payroll, clear an existing loan, add inventory, and more.
Ideal for Small Businesses
Invoice factoring helps small businesses to grow healthy and strong credit history. Building solid credit is a stepping stone to increase future chances of acquiring larger loans down the road. As mentioned above, the factoring firms can act as your personal credit bureau by offering essential advice regarding the loans and being a watchdog over your business’s invoice accounts and debtors (your customers). It is ideal for small businesses who want to boost their credit profile.
Factoring is an important and flexible financing tool to have in your toolbox. It provides the borrower with financial freedom while improving the life-blood of any business–cash flow.