Without the substantial collateral needed for a financial loan, how can you grow your business? For most businesses their largest asset is their sales, but sometimes your bills cannot wait for all outstanding invoices to be paid. Invoice financing allows a company to sell outstanding invoices at a discounted rate. In return, financing or “factoring” businesses will grant the business a lump sum of cash. This method of financing allows your company to grow even if you cannot be granted a traditional loan.
All businesses face situations where they may find themselves cash-short. Payroll, utilities and rent are all bills that require payment on time, even if your outstanding invoices are not due to be paid. Because businesses often allow their customers to pay within 30, 45, or sometimes even 60 days, the money needed to finish future orders and pay for labor on completed orders can spend a long time reaching your business. Bank loans can take months to process, and can be difficult to obtain for new and smaller businesses because of the amount of hard collateral often required. Instead of going to a bank, a business can turn to a business that factors invoices.
The invoice financing business will pay you a large percentage of your total invoices up front. Then, when your customer pays them the total due, the business will take a factoring fee—a percentage of the original total of the bill—and pay you the rest of the money due to you. This immediate form of payment offers your business the liquidity to continue paying your bills as needed.
Invoice financing is not only used when a business needs to make ends meet. In times of expansion, this short term funding method can be a boon to your business. You might need money to take advantage of a rare opportunity in training, product development or asset acquisition. Allowing opportunities like these to pass you by because of a lack of funding could be detrimental to your business. The fees associated with invoice factoring could be part of a well-invested development strategy for your and your business, which will continue to pay benefits well into the future.
There are fees associated with invoice financing that can make it an expensive option for funding. In return for the fees, you are allowed immediate access to cash, which is a rare opportunity. Small businesses are choosing to take advantage of this practice more often because of its advantages.