As companies look for ways to generate cash in an economy that is making it increasingly difficult to keep their doors open and get by based on the revenues from service or product sales alone, it is important that they be aware of every available option to raise capital. Many businesses mistakenly believe that debt is their only option. As a result, they go from bank to bank hoping to be loaned money.
This may be a viable option for some companies. However, it isn’t one for every company and for a variety of reasons. Some businesses simply haven’t been around long enough for them to be given serious consideration by a banking institution. Others don’t have stellar credit, which takes them out of the running for most bank loans.
Business loans have always been pretty challenging to obtain. However, they are even more difficult to qualify for today. One great alternative is invoice discounting, which we will discuss in more depth below.
Invoice discounting can be an excellent way for a business to generate capital. As long as a company’s customers have good credit, it will be possible for them to work out a deal with a Factor. A Factor will purchase businesses’ invoices for a discounted price. This typically is within the 70% to 85% range. For example, a £1,000,000 invoice may be purchased for £850,000.
After the purchase, the Factor will begin the collection process. All payment arrangements will stay the same. If an invoice is due in 30 days, and has not been paid within that time, the Factor may then begin sending letters to the client and making phone calls if necessary.
After they have collected the money, they will then return any amount over and above the discounted price, to the company they purchased the invoices from. They will in turn, be paid a fee for their service. This fee will be dependent on the Factor, the age of the invoice and their ability to collect on the invoices.
Invoice factoring can be a fantastic way for businesses that invoice their clients to generate capital. Instead of having to wait until these invoices are due, they are able to be paid right away for them. This can help improve cash flow problems and provide businesses with much needed monies.
The process is typically a short one, not taking more then one week in most cases, though once a business has established a relationship with a Factor, they are often able to get cash even faster, many times in only 1-2 days. This makes a Factoring company an incredible resources for businesses that might need access to money extremely fast.
