What You Need to Know About Invoice Factoring
There are millions of small businesses in the United States. Each one relies on revenue from customers, and invoices play a crucial role in collecting revenue. Invoice factoring is one of the ways that you can earn revenue for your small business.
What Is It?
Invoice factoring is like a cash advance on any outstanding invoices you have. It is a great option for small businesses that need to keep their cash flow moving. It is especially useful for companies that have a business to business sales model. Any outstanding invoices that other businesses haven’t paid can be turned into cash. This means that you can access the funds from your orders without waiting for your customers to pay.
How Does It Work?
Basically, you sell your accounts receivable for working capital. Invoice factoring companies can give clients up to 90% of their clients’ invoice amounts, as long as their customers have decent credit. This means you can access your funds before your clients pay, and you can keep your business functioning normally. Once your customer pays your company, you will receive the rest of the funds you were owed and only have to pay a factor fee. The main benefit is that you get your money immediately and without worrying about paying interest on loans. This can make a big difference if you frequently deal with customers who are slow to pay their bills.
What Is the Factor Rate?
The advance that you will receive from a finance company comes at a small fee. The percentage that you will pay in fees is called the factor rate. The factor rate will be applied to the total of your invoice. For instance, an invoice of $10,000 with a factor rate of 3% will lead to a factor fee of $300. Fair factor rates are roughly 1% to 5% of your invoice total, although they can change based on the number of invoices you have each month. However, the remaining amount of money that you receive can be used for whatever you need. This means that you can count on a consistent cash flow for your business.
This technique is a great option if you are looking for a cash advance on your outstanding invoices. If you have customers with good credit, you can receive almost all of your invoice total upfront. This allows you to earn revenue for your small business quickly.