Only a minority of small business loan applicants get approved after going through a rigorous sanctioning process at conventional banks. This should not disappoint small businesses, as there are many other ways to raise quick funds, including their own sale process. Invoice factoring is all about selling the receivables to a third party for quickly getting hold of money, as described in the guide, invoice factoring explained.
In case of businesses that have a healthy sales process, invoices that are pending or not likely to be cleared immediately can be put to good use. They can be used to generate quick cash by selling them to a third party, which agrees to pay eighty percent of the amount in what is called invoice factoring. The remaining amount is received minus a certain commission when the invoice has been cleared.
Invoice factoring is another way to raise money, apart from trade credit, where a business can get more time to pay to its own suppliers, or get a discount for settling the invoice early. The process is good especially for those dealing with business or government contracts.
With invoice factoring, the third party verifies the documents, and the agreed amount is paid to the business inside a working day. The customer on whose name the invoice is made will thus pay to the third party, also called a factor. It should be obvious that these customers ought to be genuine and reliable.
With loans, the money requires to be paid back, but with invoice factoring, there is no such requirement, as the invoice money isn’t a collateral. The invoice has been traded, and thus the amount s immediately received. Another benefit is that factoring takes care of the burden of collecting payment from customers. Cash flows are not interrupted, and factoring also brings down bookkeeping requirement. The money generated can be used to pay suppliers and clear bills on time.