Small businesses often have limited resources. If the amount of credit sales is huge, a company may face issues related to cash flow. With invoice financing, it is possible to deal with short-term financial crunch without relying on asset-based lending. Also known as factoring, this is a form of financing, where you sell your pending debtor invoices to a factoring service that offers a quick loan, mainly for working capital needs. Here are the top facts at a glance.
- Invoice financing doesn’t require collateral assets, and therefore, this is not a loan in technical terms. You are just selling your invoices, which are pending and will be paid in due time. There are companies, known as factoring services that take up the invoices. They will charge a small fee for their services.
- This is a good choice for businesses that don’t have long credit history. If you have a small business with limited assets, you might not want to pledge your resources for a big loan right away. Plus, invoice financing allows you to take the amount as required.
- With factoring you can maintain your creditworthiness in the market too. As a new business, you wouldn’t want to delay the creditor payments, and when you are short of cash, you can contact one of these factoring companies that will handle the financial requirements. As long as you have genuine debtors, getting a loan isn’t hard.
- The whole process of invoice financing is simple and easy. The factoring service is typically interested in the creditworthiness of your debtors. If your debtors have a good history of making payments in time, you can expect to get the loan in a short time. There’s no waiting for 90 days and other hassles that you would associate with regular asset-based funding. Only current invoices are considered by such services, which is something you need to note.
- Please note that factoring services will not pay the entire total of the invoices right away. In most cases, businesses get around 80% of the amount. The remaining 20% will be paid when the invoices are paid, after deducting the fee of the factoring service.
If you need quick cash but don’t want a loan that impacts the balance sheet, consider factoring as a good tool for short-term needs.