Do you Understand Invoice Factoring?
Are you under the misconception that your customers see invoice factoring as unsavory? Do you even know what invoice factoring is?Invoice factoring is a useful tool for small business that can help you survive from month to month and grow the business. It is a great way to get cash flow through your business, based on work you have already done and invoiced your customers for.
What is Invoice Factoring?
Invoice factoring is where a small business sells their accounts receivable in return for working capital. It is a simple process and there are three groups involved in successful invoice factoring:
- Invoicing Company. This is you. Your business has billed your customers for your services and goods for the last 30 days and is waiting to be paid. It is you who wants to convert your monthly accounts receivables into cash flow. For argument’s sake, let’s call you Justice Trucking Company.
- Customers. These are the customers invoiced by Justice Trucking and they may have up to 90 days to pay. This is a long time for a small business to wait for payment. If customers are late paying their invoices a small business could be in real trouble.
- Invoice Factoring Company. This is a finance company that is willing to buy your accounts receivables. Justice Trucking has an account with freight factoring companies each month to convert their invoices into cash flow.
Watch this video
http://au.youtube.com/watch?v=z3h1af1A_Os
How does Invoice Factoring Work?
Justice Trucking is a growing company with large wage bills, and repair bills o keep their six trucks on the road. They also need to replace two of their trucks that spend more time getting repaired than working. What is difficult is that Justice has hundreds of thousand of dollars outstanding in accounts receivable every month.
It can take up to 3 months to get paid and, in the meantime, this can be the difference between survival and bankruptcy for a small business. Justice can not use their accounts receivables as working capital so it makes sense that they consider invoice factoring as an alternative. In this situation Justice are in a good position to apply to an invoice factoring company to turn those invoices into cash flow to keep them operating.
For a company like Justice Trucking there are trucking factoring companies that specialize in buying accounts receivables that pay up to 80 percent of the invoice values. Once Justice sells their invoices, they have the working capital to get through the next month and buy the two trucks they need.
Justice Trucking’s customers now pay the trucking factoring company the amount they owe you. Once the full invoice amount is paid, the finance company pays out the balance to Justice Trucking less a fee for their services.
This type of financing does not suit every business and you must be sure that invoice factoring is the best thing for your business and your customers. Do your research before you decide whether invoice factoring is the right decision for you or not.
.
Loading ...