Invoice Factoring- Find Out If It Works For You

All businesses have pending bills to pay off and hence require money on hand at all times to make different payments such as paying to suppliers, employee salaries and maybe go in for quantity purchases to get that extra discount. If your terms of credit to your customers are between 30 to 60 days and if your business is growing quite fast, you might not be able to wait that long for your payment to mature. Then, in this case you require invoice factoring.

Invoice factoring is when a third party, i.e. an invoice factoring company "buys" off an invoice which you have issued to your customer and pays you around 60 to 90 percent of the invoice value in 24 to 48 hours and the balance amount, minus a factoring fee, when they receive the payment from your customer on the due date. This frees you up from waiting to collect your payment after the credit period is over and hence allows you to invest that money immediately, back into your business.

So, if you are in a business where you have to give credit to customers, then you will require funding to get over that credit period. You could get a bank loan, but for that you will be required to submit many documents, spend a lot of time running around for the right bank, and will eventually still have to pay interest on that loan. You could also select a venture capitalist to put in funds but that might compromise on the right of running your company the way you want to. So in this case, invoice factoring can help you out with the minimum of fuss and time.

Invoice factoring also helps you to offer credit periods to your reputed and proven customers, thereby increasing your sales and hence your profits. Once your sales increase, you can go in for bulk purchases, which will be beneficial since you can negotiate a better price with your suppliers. So, this again can work in your favor.

Most factoring companies also have their own collection staff to handle collections from your customers and also send you regular statements regarding the payments collected and out standings from your customers. This helps you to reduce your own collection staff and redirect your energies in sales.

Once you have decided that you need invoice factoring, you will need to find the correct company to handle the job. You can check out the Internet, or hire a factoring broker to find out details of the company. Find a company that gives you a decent "discount" on the invoice value, but more importantly, gives you good service and doesn't harass you or your customers. You may have to sign a yearly contract with the company, but if possible insert a "termination" clause, which gives you the right to terminate their services if you are unhappy with them for any reason or if you find that invoice factoring is not your cup of tea.

So, from the above points, you can decide whether you actually require invoice factoring and if once started, if it really works for you.