Instead of relying all the time on loans with collaterals, small businesses have a wonderful way to keep cash flow volumes high. It’s called invoice factoring or accounts receivable factoring. By selling their yet to be paid invoices to a ‘factor’ or third party, business owners get immediate cash without going through the hurdles of loans and approvals.
The invoice factoring process is simple. Businesses that engage in B2B selling or government deals can sell their receivable invoices at a discount to a third party. The usual discount is 20%, so the business will receive 80% of the amount, and once the invoices are cleared, the remaining amount minus a fee. The customers receiving the invoices should be creditworthy, and invoices must be correct. The factor will thus verify the invoices, and offer the amount on the same day. The customers pay directly to the factor to clear the invoices.
Factoring is quite different from a loan as the invoices are not being shared as collateral but actually being sold. Thus the business owner can immediately sell the invoices and get instant cash without having to wait for lengthy loan sanctioning periods.
Invoice factoring also does away with the risk of not being able to make collections. The cash flow cycle remains operational and working capital is always at hand. The balance sheet also becomes more liquid. Factoring also reduces the cost of bookkeeping as well as overheads. A business can easily pay suppliers as well. By using invoice factoring, a business is not putting up any collaterals or taking a loan risk, but simply using its own business operations for funding. This makes the entire finance system more robust and ticking all the time.
Invoice factoring is not difficult to comprehend, and there are guides such as invoice factoring explained that reveal its basic steps.