Most business owners today face challenges in terms of funding their businesses years or soon after they started operating. It’s a common thing. There is no such enterprise that can make ROI after 1-2 months of running. If you have been doing business for a while now, you may know the different types of debtor finance, of which Invoice Factoring is one. The question of whether it can save your business or not is sill unanswered and if you are looking for something to inspire you and keep your business going, here’s what you need to know about invoice factoring.
What is invoice factoring?
Invoice factoring is a debtor finance approach wherein you sell the accounts receivable of your business to a factor, which is usually a third party, in exchange for discounted funds. This is used by companies to meet their cash needs and an alternative to getting a loan. If you are not that familiar with the term, this debtor factor is also called accounts receivable factoring. Note that this is different from accounts receivable financing, which is a form of transaction where you use your accounts receivables as collateral.
How does invoice factoring work?
It’s easy to understand how invoice factoring works. First off, your company sells goods and services to customers and they pay on account. You record these payments as your accounts receivables until they pay you in cash. If your business needs funds immediately, you can sell your accounts receivables to a third party called the factor. What’s good about this approach is that you don’t have to wait for your customers to pay anymore. Next, the factor will verify your accounts receivables and then send you money as payment. The usual percentage you will get is 90% of the account. 10% is considered a discount. Finally, the customers will pay directly to the factor and in case there is a paid difference, the factor will return to you the payment less the factoring fee.
Can Invoice Factoring Save Your Business?
Moving on to the biggest question–can invoice factoring really save your business? The answer depends on where you are going to use this debtor finance, Let’s take a look at two different sides. First is the short-term financing of your business. Yes, invoice factoring can save your business if you need immediate cash to save your business from falling. For instance, you are going to use the proceeds to pay for your existing loans or to invest in new products and services. That’s going to help your business for a short period of time.
On the other hand, invoice factoring has fewer chances of saving your business if you keep on doing it for a long-time. Try to add up the discount and the factoring fee. Those charges are significant to your business. If you regularly do invoice factoring, you will continue to lose money. Remember that your accounts receivables are your sales. They are your most liquid asset next to cash. If you will keep on selling them, you will lose a significant part of your balance sheet.
Hey, I am Raj. I am the owner and content publisher at Financenize. I have completed my education till intermediate school and after that turn to a full-time blogger and content writer. I usually share the quality information for the readers in Financenize, which helps the small business, individuals and entrepreneurs and the information I share makes their task more manageable. I am expert in analyzing the current situation and deliver a profitable period to the extent. You can find me on various social media handles online.