Many times with small businesses, there can be a shortage in operating capital as you have several unpaid invoices that are set up for payment within 2 or 3 months. As you have already earned this money that is owed through the sale of goods or services, who’s to say that you aren’t able to have your money now for operating capital that may be needed for your small business?
Invoice factoring is a great way to get this operating capital by selling your accounts receivable in order to get the amount owed to you less a specific percentage. Some companies charge lesser rates, some as low as 2%, while others may charge more, some as high as 5%. The real difference is the actual factor, their experience, their credentials, and the services they propose to offer.
Once you sell your accounts receivable, these factors will take the amount of all the unpaid invoices that they are purchasing, subtracting their rate percentage from that amount and providing you with an advance that can be anywhere from 80% to even as much as 97% with some factors. This advance will provide you with immediate operating capital that you may need, without having to deal with a long and difficult process for the funding.
These factors will hold a reserve as insurance that your clients pay their due payments. In the event that the clients don’t pay, the invoice factoring company is able to retain this reserve payment, but the advance is yours to keep. The advance is never to be repaid unless your client pays you in full on the invoice in question, at which time you will be responsible for repayment to the factor. If the clients do pay as scheduled, you are given the reserve fee held and the factor is able to keep all else, including any interest or late payment charges that have been included.
The thing about accounts receivable factoring is that you are selling the rights to your collections. You aren’t able to collect on those invoices, and you have the advantage of releasing the risk of these unpaid invoices not being paid at all, while getting necessary financing for your business.