All businesses, regardless of its size or industry, requires steady flow of cash or working capital to meet the ongoing business expenses and invest in new opportunities that have the potential to foster business growth. However, slow paying clients that have bought goods/services on credit can derail your business success as you may not always have the working capital that you may need at that point and time. This is where factoring, an emerging funding solution, can be beneficial.
Factoring helps you meet your urgent cash flow needs in a timely manner without adding to your liability. It converts invoices into a factor, that too, at a discount. This is done in exchange for cash. Factoring is one of the best ways for businesses, especially startups and small business owners, to fund new opportunities and take businesses to greater heights.
How does Invoice Factoring Work?
Let’s take a closer look to see how this business funding method actually works. Here we’ll use a 90 percent advance rate and 1 percent fee.
Suppose that Company A fulfilled a $50,000 order from its Customer Y. Company A generates a $50,000 bill which is sent to both the factor and customer Y. The factor verifies with Y in 24 hours to see if the work was properly completed. After the verification, the factor advances Company A $45,000 at 90 percent of gross value of the invoice. The factor then waits for Y to make full payment of the invoice. When the factor receives the payment of $50,000 from Y, it then deducts $500 as fee at 1 percent and releases 4 percent reserve back to Company A.
During the time when the factor waits for the payment from Y, Company A can use $45,000 that it initially received for purposes like payroll payments, or project investments.
Advantages of Invoice Factoring
- It’s not a loan- therefore it doesn’t add to your business liability or debt
- Offers quick cash flow to meet urgent working capital needs
- Has no credit limit, contracts, minimums or maximums
- Does not require the applicant to have a great credit history
- Provides instant capital for business expansion and growth
- Improves credit rating
- Improves liquidity that is much needed to meet payroll deadlines, lower the risk of bankruptcy, and pay off tax obligations.
- Your factoring Line of Credit with CFC is only limited by the credit worthiness of YOUR customers!