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Most businesses are looking ways to expand their everyday operations or start new projects. These new advancements are important for the survival and progress of a business in a competitive market. However, such instances also require the business to raise cash for the funding of such expansions. This is where the question of how to and from where to raise the necessary funds becomes pertinent.

Invoice factoring and how does it work?

Invoice factoring is an effective way of simplifying everyday cash flow conversions and meeting short term cash flow problems of the business. It involves businesses selling their invoices and account receivables to factors which are specialized companies that check the credit worthiness of the invoiced customers and advance around 80 percent of the invoice amount. The rest minus their transaction fee is then sent when the bill is paid. Below are the following steps involved in invoice factoring:

  • Invoicing the customer

After providing the businesses (B2B) or government agencies (B2G) product and services, an invoice is issued to them for payment. These invoices must be payable within ninety days for them to qualify for factoring.

  • Finding a factor to sell the invoice

The next step would be to find a factor to sell or assign these invoices to. The factor, such as Carter Funding, will check the credit worthiness of your invoiced customers and your credentials against its eligibility criteria before signing the financing agreement. Also, both parties will also agree on an initial maximum dollar amount in the agreement as well.

  • Advance payments

The business will receive around up to 90% percent of the factored invoice value as an initial advance. Hence, it is the amount of transactions and the risk involved that determines this payment. Also, the invoiced clients will receive the notice of agreement by the factor that will receive any future payments these clients make for the invoices issued to them.

  • Client payments

The client will make the payment within ninety days to the factor.

  • Remaining Payment and fees

As soon as the factor receives the payment for your invoiced clients, you will receive the remaining balance of around twenty percent of the invoice, minus the factor’s fee.

Other financing alternatives: credit cards?

Businesses now have several financing options at their disposal with credit card financing being one of them. Obtaining a business credit card comes with the benefits of easier record keeping and business-specific benefits offered by banks such as fuel discounts, merchandise redemption and gift cards. However, despite these perks, a business could suffer by having a business card. The credit card related fees must also be considered. More importantly, it must be determined whether these perks and benefits are profitable for the business or not. It is better to look for other options such as invoice factoring if the use of business credit cards inflict debt or financial distress in the form of cash flow issues for your business.

Why is invoice factoring better?

There are several reasons why businesses might choose to opt for invoice factoring rather than the more complicated and risky alternatives such as obtaining business credit cards and loads. Below is a list of these reasons.

Invoice factoring is simpler.

Not all businesses, especially the new or small ones, qualify for a bank loan or credit card benefits. Hence, in such cases invoice factoring is a great non-bank funding option for the businesses to opt for. A factoring company, unlike banks, is not a traditional lender and therefore, it also has not so rigid ending requirements and eligibility criteria for the businesses to meet. It works with businesses in different industries and with diverse financial positions. In addition to this, the process for invoice factoring process is also simpler and easier for the businesses.

Invoice factoring is faster.

It may take several days to qualify for a bank credit card or loan and even more for its further processing. However, with invoice factoring you can get a faster access to cash in order to meet your everyday cash flow needs. The funds are provided with in 24 to 48 hours after your invoices are approved. 

Invoice factoring is more flexible.

Your business is not required to specify minimum or maximum invoices in the contracts. It can make the decision about how many invoices it wants to factor and how often depending on its sales performance and everyday cash flow needs.

Invoice factoring is without debt.

Business credit cards could mean accumulation of a lot of debt in your balance sheet and interest rate payments you would need to make constantly. In contrast to this, invoice factoring is a debt free financing option, where your own invoices are converted in to cash for you to improve cash flow.  This not only means that now you can have a cleaner balance sheet, but it also entails an opportunity of using factoring as a way of increasing profits. This can be done by taking advantage of a better cash flow situation to make early payments, obtain bulk discount from suppliers, give timely staff payments and request increased inventory for large orders.

A business must consider several things before making the decision about which financing option to choose. This decision should depend on its spending habits, credit history and also the credit worthiness of its customers. Invoice factoring is an effective way for business of all sizes, whether new or well-established to obtain finances for funding their everyday work operations and ensuring a good cash flow system, with little administrative and costly hassle. Therefore, it must be considered as a viable alternative to business credit cards or bank loans.

Do you have questions about invoice factoring?  Contact Carter Funding today to learn more!