December 12, 2012

Understanding the Role of Invoice Factoring for the Businesses In Need Of Working Capital

In simple terminology, invoice factoring is the situation when company sells all their receivable debt to the other companies. Whenever the company raises invoice to the debtor, a similar copy is forwarded to the factoring company. Then, the factoring company will immediately pay set percentage of the invoice value, which is usually in the range of 75 - 80 percent. The rest is paid to client, once debtor pays the invoice. A factoring company usually takes percentage fee varying from 2 - 6 percentage of the bill value, and that’s how the factoring companies make money from the deal.

When is Invoice Factoring a Sensible Option?

In other terms, when businesses need the working capital, they do have the business financial tool that is overlooked very often. It is called the invoice factoring and is an effectual substitute to bank loan.

There are many pioneering factoring companies with the heritage that spans to 5 decades. Since these types of companies charge a considerable amount of money, we’ll begin with the cost issue.

Factoring vs. Bank Loans

The bank loans are less expensive when compared to factoring, but factoring involves very little paperwork.

When you look at a bank loan, there are number of costs that play a role in addition to the interest on the amount that you own, including audit charges, annual fees, set up charges, and servicing fee.

The end result will be much closer to the factoring cost. Few finance companies offer factoring fees charges as the percentage of invoice. It generally includes complete finance cost, receivables management services, and credits.

When you start structuring, the bank loan debt is established. Whether it is line of credit or a term loan, collateral includes the company assets and a personal guarantee.

On the other hand, invoice factoring is not a loan; so there is no debt and collateral comprising of receivables in most of the cases. The company contract terms are as short as 6 months. Therefore, theirs is no necessity of personal guarantee, and other such complications in the process.

Benefits of Invoice Factoring

Invoice factoring offers a host of services that you don’t get through bank loans. We can also finance in the range of 95 percent of invoice cash and also offer invoice processing, guarantees, credit reviews, and receivable management services that include reporting, collection, and posting.

Banks do have stringent requirements for processing the loans. Usually, bank requires that the business has at least 2 to 3 years of financial records. There should be a positive cash flow, 2 to 3 years of income tax returns duly filed, along with strong credit history.

They put the limits on the collateral depending upon various factors like outstanding balance, tenure etc. Few factoring companies do not require any certainty on the time. They take current taxes into consideration.

In a Nutshell

At last, whoever has tried to avail a bank loan knows that paperwork is pretty extensive and the turnaround time may extend from 2 weeks to 2 months. Few finance companies do have very minimal turnaround time that varies from as little as 2 days to 2 weeks.

If your business needs working capital, you need to improve the cash flow devoid of incurring the debt or the tying up with company assets. You need to carefully choose the financing companies for invoice factoring. You may even want to review your billing process, and try to make use of a good invoicing software program to improve your cash-flow.


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