Small businesses, especially startup companies, are no stranger to the hardships of securing a business loan. Banks and traditional lenders require a business’ proof of viability and are often hesitant to lend money to those without enough income and assets. This means businesses, especially small ones, need to be operational for a few years before they can obtain a loan. These prerequisites leave owners with few options for securing funds. Fortunately, there is one option that most businesses overlook – small business invoice factoring.
Benefits of Small Business Invoice Factoring
Invoice factoring is a great way for small business owner to secure the funding they need. Technically, invoice factoring is not a loan, but rather a business transaction. You sell your unpaid invoices to a third party (a lender or a factoring company) in exchange for immediate cash.
Small businesses benefit from invoice factoring for a number of reasons:
- A company can increase working capital without taking on new debt. While borrowing money is sometimes necessary, most businesses prefer to obtain funds without incurring debt. Loaning money is risky and if you fail to pay it back, assets can be repossessed. It can even bankrupt a company if the debt becomes overwhelming. With invoice factoring, you avoid those type of problems. A factoring company or a lender does the job for you – all you have to do is to receive the payment for your pending invoices.
- If your business needs quick access to additional working capital, invoice factoring is a great option for quick funding. When your business is in a seasonal slump, you still have to compensate your employees, buy supplies, and pay rent. You may need cash fast. By selling your invoices, you can receive money in as little as 24 hours. If it’s your first time transacting with a lender, you may need to wait four to seven days before you receive your funds.
Once you’ve arranged all the necessary documents, the process of invoice factoring is relatively simple. When a business sells its invoices to a factor, it typically gets up to 85% to 95% of the value. For instance, if your invoice is worth $100,000, it may sell for $90,000. The lender or factoring company holds a percentage of the invoice value until your customers have paid their invoice.
Once invoices are fully paid, the factoring company/lender will send you the remaining amount of money, minus a fee for services rendered. Your business is then free to use the funds where they are most needed.
If your business has pending invoices and is in need of immediate access to cash, you might want to check out invoice factoring. It’s a great financing option for small businesses like yours. If you want to know more about small business invoice factoring, the experts at SMB Compass can help.
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