Are you regularly doing business with commercial or government clients? You probably are, and if this is indeed true, then you probably go through the regular ordeal of having to wait a month, maybe two, or in rare cases three before your good customers come up with payment.
Most of the time, bigger companies can afford to wait it out. Unfortunately, few small business owners can afford to wait and worse most small business owners do not take into account that they will have to wait to get paid when they first start their businesses.
So what’s to do if sixty days is way too long a wait before getting paid? Simple – factor your invoices and you need not worry about waiting.
Factoring is a financial tool (similar to a line of credit) that eliminates waiting to get paid by your clients. Instead of waiting two months, you wait one day tops to get your money in factoring financing, calculated from the time you submit the invoices. You now would have the money to pay rent, overhead, salaries and other assorted business expenses or future investments.
Invoice factoring is best used for businesses such as staffing, medical offices, trucking, staffing and information technology. This is how it goes.
You generate an invoice for a product sold or a service rendered.
Two copies of your invoice would then be sent, one of them going to your client and the other to the factoring company.
The factoring company would advance you about 70 to 90 percent maximum of your invoices.
About 10 to 15 percent is held in reserve to hedge against financial disputes.
The client pays the factor the money tallied in the invoices, and the reserve is paid back as a rebate minus a small fee.
What does factoring cost anyway? There are several factors, such as the duration it takes your clients to pay, their overall credit worthiness and the amount of business you transact. Majority of factoring companies charge fees that range between 1% to 2.3% for each 10 days an invoice is left unpaid. However, fees vary and can usually be customized to fit your needs.
The main difference, really, between bank loans and invoice factoring financing is that the latter is so easy to qualify for. Because your invoices would be financed by the factor, it is important to make it a point you deal mainly with credit worthy businesses. So long as you are dealing with trustworthy clients, factoring may be available to your business, even if it is a smaller, newer operation. Lastly, factors would never “give you the third degree” when it comes to requirements, unlike banks who ask for three years worth of audited statements, streams of financial documents and a partridge and a pear tree.