There are a lot of myths and misunderstandings about how an invoice factoring company operates and how they can benefit a business of any size. Understanding what factoring really is and how it works can help to dispel these myths and to see the advantages this offers over other types of funding options.
The Basics of the Business
A challenge for any small to large sized company is cash flow. This often occurs when the business completes work, supplies staff, or supplies products to their customers, and the customer has 30, 60, or 90-days to pay the invoice. In essence, the business is financing their customer until the invoice is paid, leaving the business with cash coming in eventually but not immediately accessible.
When an invoice factoring company gets involved the business sells some or all of their accounts receivable to the factor. The factor then advances up to 80%, and in some cases more, of the total value of those invoices, giving the business immediate cash.
The factor holds a reserve amount, which is about 20%, and deducts their rate for the service, which will be a small percentage, often less than 3%. Once your customer pays the invoice in full, the factor deducts any additional fees and provides you with the residual amount.
As an example, if your business sold $200,000 of your accounts receivable to a factor, you would receive $160,000 within a few business days of approval. The remaining $40,000 would be held by the factor in reserve. Once the invoice is paid, the factor releases the reserve back to you less the fee taken from the reserve. This is way to confusing. I don’t even understand what you are trying to say. Using an Invoice Factoring Company
An invoice factoring company will have a minimum requirement for accounts receivables to use their service. For companies that are small business friendly, this can be as low as $25,000 in AR, which makes it very accessible.
Funding can provide millions of dollars for qualifying businesses. Without the need for a bank loan, to repay interest, or to provide a personal guarantee, using an invoice factoring company is a very smart option for almost any small to large business.