The Basics of Factoring

If your company relies on accounts receivable payments from customers, you’ll likely find that your business struggles to keep up with expenses as the unpaid invoices pile up. To keep your business afloat while you await payments from customers, consider the benefits of invoice factoring.

Understanding Factoring

Invoice financing, sometimes called invoice factoring, is a great way for businesses to receive a quick cash advance in exchange for selling the unpaid invoices to a financing company. In some cases, the invoices will not be sold, but you can use the accounts receivable as a collateral to gain access to a revolving line of credit.

How It Works

If you’re interested in pursuing invoice financing as a quick source of cash to help your business stay afloat, you’ll likely be pleased to find out that this type of financing is quick and easy to apply for. The odds of being approved are in your favor, since invoice financing is not a loan. You’ll be using your business assets in a sale to a financing company in exchange for a fast influx of cash, so a solid credit score or several years of tax returns are unnecessary to complete this transaction.

Reasons to Use Invoice Financing

With invoice financing, you’ll sell your accounts receivable in exchange for installment payments from the company that you’re working with. After you’ve presented the financing company with the details of your accounts receivable, they’ll review the accounts to make sure that they’re worth purchasing. The invoices will need to be held by reputable clients that are likely to make a payment with no issue in order to be accepted. After the financing company accepts your accounts receivable, they’ll deposit approximately 80 percent of the accounts value to your bank. From start to finish, the process usually only takes about a day or two, so it’s an excellent way to get access to cash using an asset of the business.

Asset-Based Loan With Accounts Receivable

If you’d rather use the accounts receivable for a loan instead of making a sale, this is an option as well. Instead of selling the accounts and receiving a lump sum of cash, you’ll be able to gain access to a revolving line of credit and pay as the customers make payments on their accounts. This type of funding is ideal for businesses that want to keep their assets but also be able to finance recurring business expenses. However, this type of lending is more difficult to qualify for, and you’ll need a respectable credit score and a strong financial history.