Understanding Invoice Factoring and Why it Is Needed

The Romans were the very first to use promissory notes, which is actually where factoring stems from. America itself was built on factoring, because Europeans at the time were willing to invest money into the new country, being promised big returns. Even government bonds work on the principles of factoring. But just what is invoice factoring?

What Is Invoice Factoring?

Very simply put, it means that you can get cash money for any invoice that is still outstanding. A lot of small businesses use this process when they need to get their hands on money really quickly, perhaps because they have a few slow paying customers. Small businesses often don’t have the money to create an accounts collection department, nor do they have the time to wait for the money. Thanks to invoice factoring, their business doesn’t have to end up in trouble.

Generally speaking, if a business needs money quickly, invoice factoring is the way to do it. Cash is, unfortunately, invaluable and if none is available, the business will grind to a halt. By selling an invoice, you are able to get your hands on money immediately, thereby driving the business forward as well.

It is important to not confuse invoice factoring with loans. You are not borrowing money against an invoice. Rather, you are selling it outright. The cost to you is that a certain percentage of the total invoice will be kept as a fee. These fees vary depending on the creditor, the factoring company and your financial standing. In the best case scenario, it is around 2%, meaning that you would get $98 for every $100 invoice you raise.

Who Uses Invoice Factoring?

A lot of different industries use invoice factoring to stay afloat, such as:

· Manufacturing

· Transportation

· Wholesale

· Distribution

· Consultancy and staffing firms

· Service providers

· Telecommunication companies

No business can operate without cash. Money is needed to purchase materials to provide new products or services. It is needed to pay for staff. Overhead costs have to be met and so on. If just a single customer doesn’t pay on time in a small business, it can mean that they are unable to keep their business going. Some other situations in which factoring may be of benefit include:

· Having little to no credit history so that the banks will refuse any request for a loan.

· Businesses who do not have sufficient cash flow to take advantage of profit opportunities and sales that are happening right now.

· Companies that have problems with their tax, credit or income.

· Companies that could make a quick profit even if they have filed for bankruptcy.

· Companies that know they will soon grow, but do not want to start their new growth period with debt.

· New businesses that do not have any finances yet.

· Businesses that experience strong patterns linked to the season, or that experience irregular and uneven patterns.

The top and bottom of it is that invoice factoring ensures businesses are able to provide their service or product at all times.