Small business owners often experience cash flow difficulties. Especially when their clients are other businesses to which they offer 30 to 90-day intervals before bill payments are due. On the one hand, the owners want to keep the good favor of their customers by offering favorable payment terms; but on the other hand, they need the funds immediately for rent, employee salaries, equipment upgrades, inventory, and other expenses. One solution to this problem is invoice factoring. Here is some information that can help you decide if this method of financing can meet your company’s needs.

Invoice Factoring Basics

Invoice factoring is a type of funding that involves selling your unpaid accounts receivable to a factoring company in exchange for a cash advance. When your application is approved, you receive up to 85 percent of the value of the invoice right away. Once your customer pays their bill to the factoring company, you receive the balance owed to you minus a factoring fee of 1 to 5 percent. The amount of the fee depends upon the sales volume of your company. The value of the accounts receivable, the credit ratings of your customers, and whether the factoring type is recourse or nonrecourse.

Recourse and Nonrecourse Factoring

The terms recourse and nonrecourse refer to who is ultimately responsible if your clients do not pay their bills. In recourse factoring, the responsibility falls on your company. If customers fail to pay, you have to replace the receivable with one that is at least equally valuable or purchase back the unpaid invoice. While in non-recourse factoring, the factoring company takes on responsibility for unpaid invoices. Typically transaction fees are higher for nonrecourse factoring.

Benefits of Invoice Factoring

When your clients are slow in paying their bills, invoice factoring offers swift relief, making it possible for you, in turn, to be able to handle your ongoing expenses. Instead of experiencing a drop in cash flow while waiting for customers to pay, you can keep cash flow strong. Even if your credit rating prevents you from obtaining a traditional bank loan you can qualify for this type of funding, because factoring companies are more concerned with the creditworthiness of your clients. Invoice factoring also does not require collateral, so your assets are safe.

For more advice on invoice factoring, contact Toluca Lake Capital.