So you’ve signed a deal for a long-term project with a new client but now you face one dilemma – your new business lacks the funds to get production going. You might not have the initial capital to fund your employees’ salaries or to pay for the production costs to get the job going. What would a business do in a time like this? To save the business and finish the job most managers and business owners turn to banks and creditors to secure a loan. Others turn to a factor company and avail of invoice factoring.
Invoice factoring is not entirely new but it has only seen popularity within the past few years, mostly because a lot of people thought it was just another type of loan or scam. It’s not a loan because a loan requires you to pay the money back with a level of interest. Here it is your client that pays it and there is no interest charged on the amount. Basically the factor company will buy your invoices/accounts receivables (but with a small discount, i.e. they give you 90% of the invoice and then keep the 10% for their profits) and then they will be the ones to collect the amount from your client.
How Can This Save Your Business?
You might be thinking to yourself – how is this going to save your business? If you are only going to get 80-90% of the total amount due to you what is the advantage of going to a factor company in the first place? Consider the following:
Quick Cash – it might take your client 30 to 60 days to pay you and that means you’ve got one to two months of working without any initial capital. It could take just as long for the bank to process a business loan or for you to secure a joint venture. However when you go for invoice factoring you get your money in just two to three business days.
• Easier Application – if your transportation factor service is relatively new then you may have absolutely zero chances of your loan application getting approved. This is not the case here since the factor company will review your client, not you. This makes sense since it is the client that will pay the amount when the time comes to fulfill the invoice.
• No Interest Fees – when you take out a loan you have to pay it back with an added interest charge. For example: if you borrowed $100 you would most likely have to pay the creditor $110. However when you go for invoice factoring they simply buy the amount, albeit with a discount. If your invoice was worth $100 they will buy it for $90.
• Chance to Grow – since you get cash immediately you have the ability to handle more production. You can take on more clients, take in more invoices, keep on cashing them, and use the capital for high-end production and expansion. There is no need to wait and you can grow the business quickly and efficiently. This is one of the main advantages that attract small businesses to a factor company.