Invoice Factoring: Getting Paid and Improving Cash Flow
Cash can be a vital part in running a successful business. With enough cash, businesses can pay their bills and purchase new inventory. Many small businesses, though, may not have enough to keep up with their expenses. Fortunately, invoice factoring can help businesses increase their cash flow
Cash flow problems do not necessarily mean that a business is not earning revenue. Rather, when a business performs a service or sells products to a client, they don’t usually request that the customer pays them immediately. Instead, an invoice will typically be sent to a client, most likely another business, that list the type of work completed or product sold, the amount and the date on which the payment is due. Problems can occur when a business needs to pay their expenses immediately, but they have to wait several weeks before they can get paid.
Invoice factoring allows businesses to use sell their outstanding invoices to a factoring company in exchange for immediate cash. In return, the factoring company usually pays over eighty percent of the total invoice amount sold immediately, and then the factoring company pays the majority of the remainder when they receive the payments for the invoices they bought.
Because the factoring company is also a business, they usually keep a small (typically five percent or less) percentage of the invoices’ total amount as a fee. The size of the fee can depend on different factors like the size of the invoices, how often the business makes sales and the reputation of the customers. An invoice belonging to a large, well-known organization is typically less risky than a small business, so the factoring company may charge a smaller fee in those cases.
Additionally, whether the invoice factoring is recourse or nonrecourse can greatly determine the percentage fee. If customers do not pay their invoices, a factoring arrangement that is recourse may require the business to buy their invoices or provide newer ones that are worth the same or even more. Nonrecourse factoring, on the other hand, does not require businesses do to anything with unpaid invoices. Since nonrecourse factoring is usually more risky for factoring companies, they generally will charge a higher percentage fee.
Allowing clients the option to not pay right away can give companies a big advantage. The problem, however, is that often businesses need cash to pay their expenses, and they may not have the luxury of waiting. Invoice factoring can give businesses the opportunity to receive the cash they need immediately without risking their relationship with their clients.