4 Things You Need To Know About Invoice Factoring

4 Things You Need To Know About Invoice Factoring

When you need financing for your business, you may first think of a traditional loan, but that is not your only option. Alternative financing options, such as invoice factoring, are also available. Here are four things you need to know about invoice factoring..

1. It’s Based on Your Assets

Invoice factoring is a type of asset-based lending. When you apply for asset-based lending, you offer your company’s assets as collateral. Eligible assets may include inventory, equipment, or accounts receivables. The assets you offer will depend on the type of financing you choose. Invoice factoring utilizes accounts receivable invoices.

2. You Can Use the Funds in Several Situations

There are four main situations in which invoice factoring and other asset-based lending are most useful:

  • Cash flow constraints
  • Repayment of a loan
  • Seasonal cash flow fluctuations
  • Bridging short-term gaps and expenses

If your company typically has too many outstanding invoices, then your cash flow may suffer. However, if you factor those invoices, you can release the cash and ease your cash flow constraints and other financial needs.

3. They Are Useful for Small Businesses

Small business owners tend to find invoice factoring very useful. The process of factoring your invoices is typically very quick. You can contact a factoring company and sell your invoices soon after, rather than waiting for a bank to approve a loan application. This means you will receive funds very quickly. Depending on your company’s current size and your interest in growing your company, faster access to cash flows can be incredibly useful.

4. There Are Four Main Steps

First, you need to find a factor. Make sure you have the invoices you need, choose the type of factoring to use, and decide who to sell your invoices to. Next, you need to come to an agreement with the factoring company. The company will decide whether to approve you and then you can sign the agreement.

Then, you need to assign the factor. This means you and the factoring company need to work together to reassign all affected customers and provide them with instructions and updates. Finally, collection and payment can occur. The factoring company will provide you with your funds and collect its fees.

In some cases, invoice factoring may be a better match for your financing needs than other funding options. Make sure you understand your business’s funding needs, research invoice factoring, and compare it to other options before you make any decisions.

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