For a small business, securing asset financing is important. There are several reasons for this. Many businesses now offer sales on credit to maintain their standing amongst the competition. However, sales made on a credit basis have a downside. While the business can show that income has been generated, no cash has been received against it. Hence, a prudent investor will not be willing to invest their money in the company if it fails to recover money from its debtors.
A larger figure in the Debtors Account also means that a business must shift its focus from day-to-day activities, and instead try and recover the money from customers. All of this leads to a severe reduction in a company’s working capital and ultimately translates in to losses. Invoice factoring services can help prevent that from happening.
What Is Invoice Factoring?
Invoice factoring services are becoming increasingly popular nowadays. Invoice factoring, or invoice discounting, as it is commonly known, is a type of asset financing that allows businesses to provide a temporary injection to their working capital. Factoring companies offer such services.
Companies that offer invoice factoring services analyze the list of debtors of a company and determine the credit risk involved. Several factors are considered. The age of the receivables, the amount in the receivables account, and the credit history of the debtors are some of them.
Once the analysis is complete, the factoring company offers a reduced percentage to its client. In the current markets, the percentage ranges between 80% and 90%. Invoice factoring services allow businesses to free up working capital and shift their focus from debtors’ recovery back to their daily business operations. Rather than waiting for 30- 60 days for collection, businesses can get an instant injection of cash with invoice factoring services.
The Process
1. A business that wants to factor its services must generate sales of $25,000 on credit per month. Some companies even require a greater amount.
2. The business must send details of all of its invoices to a factoring company with whom it has signed an agreement.
3. After analyzing the invoices and assessing the credit risk, the factoring company will offer a cash advance on the invoice. This process takes anywhere between 48 hours to a week depending upon the size of the Debtors Account factored.
4. The factoring company usually assumes the credit risk of the account and collects full payment from the customers on its own.
5. When the factoring company receives full payment for the invoice the remaining portion of the involve minus the advance and fee is paid back to the business. A service fee and interest is deducted from this amount. The balance sheet of the company remains unaffected.
