Invoice factoring Guide
When you are a small business owner, or you work in an industry where payment for goods or services is made several days after delivery, money can become a serious problem. After all, the payroll and operating expenses do not wait and for the company to continue to operate requires economic resources so when this happens entrepreneurs have two options, the first is to go to a bank to apply for a loan on the understanding that it is usually a long and complicated process that may or may not work depending on the credit history of the applicant, which will always be asked to leave their bills as collateral for payment of the loan granted and all this at an interest rate that is usually not very attractive. Or, with those same invoices, you can go to a factoring company and sell them.
Invoice factoring is usually very common among small entrepreneurs and even among large companies dedicated to certain branches of productive industry, as it allows them to have immediate economic resources that help them continue operating without any interruption. Invoice factoring is also a good option when they face cash problems related to services whose payment date has not yet arrived.
The way Invoice factoring works is very simple, the entrepreneur takes their outstanding invoices and sends them to a factoring company who reviews the credit history of debtors and analyze the viability of their payment and if accepted they will pay you between 60 and 70% of the total amount of the invoice with the understanding that the remaining amount will be paid once the buyer of the goods or services pays the entire debt, the factor will deduce from this amount a percentage that constitutes the fee of the factoring company.
The amount of the fee that corresponds to the factoring company is determined based on different elements such as the number of invoices to be submitted, the amount of the invoices, the credit history of the debtors, the due date of the invoices, and if they have worked with them in the past. In conclusion, the more feasible the payment of the invoices is, the lower the fee that the factoring company will charge.
Invoice factoring is much simpler than going to the bank to ask for a loan and does not impact your credit history so it is a great solution if you are looking to avoid incurring debt or you don’t have the best bank record, even if at certain times the factoring fee may seem high, it is worth considering its many advantages because in addition to those mentioned above also allows the entrepreneur to know the record of its customers and thus know who it is convenient or not to negotiate with.
Moreover, since the invoices are sold to the factoring company, they assume the responsibility and costs of collection, so it is not necessary to spend time and money and to have your staff to carry out the necessary steps to collect the invoices from your customers.