One of the challenges of looking for conventional business financing is that it can take a very long time to find out if you will qualify for it or not. Although there are no hard and fast rules, most companies report that it takes a couple of months to go through the process. It’s understandable that institutions take that long to reach a decision, they have to do a lot of due diligence to make sure they make a solid investment. At the very same time, the long application process also puts your company in the very tough position of waiting a long time to know if you’ll get financing – or not.

If your company needs financing quickly – or can’t qualify for a business loan – you should consider whether invoice factoring is the right solution for you. Factoring financing has been gaining traction, especially among companies that need flexible financing.

Factoring invoices provides a simple very proposition. It allows you to get a funding advance against your accounts receivable, providing you with working capital to pay employees and suppliers. So, instead of waiting 45 days to get paid by a client, the factoring company can give you a working capital advance. This provides the financial liquidity to meet your company’s current obligations and allows you to take advantage of new opportunities.

Factoring can be incorporated into most companies and works as follows. First, you deliver your product or service. Then you invoice your client. Now, instead of waiting to get paid, you send the invoice to the factoring company. In turn, the factoring company advances about 80% of the gross value of the invoice to you. Once your client pays the invoice, the factoring company advances the remaining 20% of the invoice to your company, less the financing fee.

Factoring costs can be higher than the costs of conventional products (e.g. business loans), which should be taken into consideration. Monthly fees can range from 1.5% to 3.5%, depending on the company’s industry, financing volume and other parameters. As a rule of thumb, factoring works best if a company has margins of at least 15% and customers that pay regularly. However, each business owner should evaluate whether factoring will work for the company.

There are some substantial advantages to using accounts receivable factoring. First, accounts receivable financing is easy to obtain. Second, it’s a flexible financing solution where financing increases are tied to your sales, making it an ideal tool for startups. And lastly, it can be setup quickly. Depending on your transaction, many times it can be financed in as little as 2 weeks.




By: Marco Terry