Invoice factoring company provide immediate short-term fund facilities to the companies who fail to obtain traditional bank loans. Generally, traditional bank financing looks for businesses to be in operation for at least two years and generate profits. Bank tends to extend the loan which is secured by any tangible asset be it inventory, machinery, equipment, or real estate.
Working with the factoring companies when compared is not restrictive. When the invoices are sold often called Freight bill factoring, it does not incur any debt so there comes no point in making monthly installment payments. This helps to control the cash flows by determining the timing and amount to be factored in. A growing young company or one with tax liens and even a bankrupt organization qualifies for the invoice factoring accounts. This makes factoring companies to be a viable source of funds for businesses.
How does it work?
Factoring companies work in a very simple manner. They purchase all the outstanding accounts receivables or freight bills held at discounted rates and issue a lump sum amount against it. Essentially, the company sells the accounts receivables at a lower value to enjoy a quick cash facility rather than waiting for 30 to 45 days till the due date of invoices.
Once you deliver your product or services and avail of an approved invoice, any factoring company would provide you cash within 24 working hours. In essence, these companies help to quicken up the cash flows. This helps to meet the financial obligations. Say, for instance, one can make use of the money to enhance the working capital, make any obligatory tax payment, pay the suppliers, pay for the acquired equipment or supplies, etc.
Generally, a factoring company pays around 80percent of the invoice value. Once they receive the payment from the clients against the invoices held, they further issue the remaining value by deducting the factoring fee. This fee is determined by the combination of the invoice value, size, average terms, creditworthiness of the customer base, and factoring volume.
Important considerations while evaluating the factoring companies
One must carefully consider, many important aspects while evaluating the factoring companies. The pricing structure is critical of all. One must calculate the total fees that would be imposed by the different vendors to check the customer payment scenarios. At the same time, a comparison of the application fees, deposits, advance rate, and monthly minimums should be done. It is necessary to check how the unpaid invoices are handled by the factoring company. Some companies absorb all the risk from non-payment whereas some companies demand to repay the funds.
All the factoring companies operate differently. Therefore, proper research work is always demanded.