Is Invoice Factoring Your Best Option For Business Financing?Is Invoice Factoring Your Best Option For Business Financing?


Short answer, yes. Your company must meet a specific criteria first.

As far as financial tools are concerned, more and more people are warming up to the idea of invoice factoring. It is a solution that accelerates payments from slow paying clients, freeing up cash flow and allowing companies to grow. By eliminating the uncertainties of when they'll be paid, business owners can use factoring to stabilize their business and put it on a growth path.

But take note factoring does not apply to everybody. For factoring to work, your business must meet certain criteria.

Your business must be established and your clients must be commercial or government entities only.
You must have profit margins of at least twelve percent.
There must be some evidence it is indeed taking your clients too long to pay up.

If the three above conditions are met, then chances are factoring financing would be just what your business needs to survive. Factoring is easier to qualify for than business loans, and more flexible, two things that offset its comparatively high cost to obtain.

Factoring would be advantageous if:

You are turning away orders because you lack the cash flow
Your cash flow, or lack thereof, is causing you to miss overhead payments, payroll, rent or other payments.

There really isn't much to a factoring transaction. After invoicing your clients, you would then sell your invoice to the factoring company, who then advances you about 85% of the invoice cost, or somewhere around that percentage. 15% is usually kept as a cushion to handle potential issues with the invoice. You get immediate funds from the advance while the factoring company waits to get paid. After payment is completed by the client, this would be the time when you would receive the 15% rebate, less the factor's fee.

Factoring costs can vary depending on your financed volume, credit quality of your clients, payment cycles and industry. Generally, the factoring cost would be about 1.5% to 3.5% monthly. To simplify things and make the option more feasible, many factors have started spacing their pricing into ten-day increments. So a factor that charges 2.7% per month, would actually charge you 0.9% for every ten days the invoice is outstanding.

Invoice factoring, simply put, is a great financing option for your company provided the criteria for factoring is met. Qualifying for invoice factoring is very easy, the biggest requirement is that you do business with credit worthy commercial or government clients.

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