Doing business is an interesting thing that is not for the fainthearted. However, conducting business with a bigger company means working by their terms and budget. Whenever you supply goods or offer services to a big company, you don’t expect to be paid instantly. Instead, they request you to wait up to three months before you can receive your dues. This may be difficult for small companies that depend on this cash to develop. Also, for big companies, this means passing opportunities to expand. All said and done, this brings the concept of invoice factoring. For starters, invoice factoring is the process of selling your company’s accounts receivable to factoring firms. However, keep in mind that invoice factoring rates may differ from one company to the others.
Why is invoice factoring important?
Companies may engage in invoice factoring for many reasons. However, many factor so that they can free their cash that will be used to meet daily expenses of the firm as well as cover payrolls. Others free the cash so that they can use it to expand their sales. Depending on where you come from, the term invoice factoring may differ. Some people refer it as invoice financing while others call it receivable financing. In some cases, it’s referred to as accounts receivable financing. Companies delay payment from 30, 60 and 90 days depending on the agreement. In a typical invoice factoring transaction, there are three parties involved. There is the financing company willing to offer cash, there is the customer who contacts the factoring company, and there is the company that generated the invoice.
Advantages and disadvantages of invoice factoring
Like any other business transaction, there are pros and cons that are associated with invoice factoring. On the good side, smaller businesses can receive funding faster. Also, the application process for invoice factoring is simple and is characterized by high approval rates as long as there is a written agreement between all parties involved. Also, for the factoring to provide the much-needed cash, all contracts must be binding. Like earlier mentioned, availability of capital means that businesses can be able to finance their operations. The simple application process, on the other hand, allows small businesses to escape the many hurdles that have been put in place by financial institutions especially banks hindering them from accessing capital. Higher approval rates mean that businesses can pounce on emerging opportunities and enhance their growth. The funds from a factoring company can make you credible to receive a bank loan in case you need one.
Major drawbacks associated with invoice factoring is that they are more expensive compared to banks. In fact, if your company can access these funds from a bank within a good time frame, it’s better to stick with your bank. Another drawback of working with invoice factoring firms is that they notify the company that generated the invoice that they have financed the due invoices. In most cases, this makes it difficult to maintain a good working relationship between the firms involved.