Invoice Factoring vs. Traditional Financing
Unfortunately, it isn’t always possible to get the loan that your business needs. And, in the current climate, many banks are turning down those that they would have helped in the past. You might need another way to get the cash you need to grow your business – or to keep operating at the same level. One of the options you can employ is known as invoice factoring.
Invoice Factoring Basics
Invoice factoring is an interesting, unique way of financing your business. When you participate, you arrange with a company called a factor, such as Advanced Commercial Capital, to buy your invoices and in many cases take over the collection of your invoices. Most of the time, after shipping goods or providing services, you send an invoice. With factoring, you can send the invoice to the customer, and then provide a copy to the factoring company. Or, in some cases, you can send the invoice to the factoring company and the factor will then notify the customer. The factor advances you the money on the invoice, and they keep the money collected from the invoices. There are many advantages to invoice factoring:
• You get the capital you need quickly.
• In many cases, you do not have to worry about collecting on the invoice from your customer.
• It is possible, with some factoring services, to pick and choose which invoices you want factored.
• It is not necessary to have a credit check for each request in many cases.
Most factors, including Advanced Commercial Capital, do charge a fee which is deducted from what they pay you for the invoice. In some cases, if you have a number of invoices that are verging on delinquent, you can sell them at a discount in order to receive immediate cash. If the factoring company manages to collect on them, then they keep the difference.
You might have to go through a credit check, or the invoice factoring company may want to approve the companies that you invoice, but this generally only has to happen once. When you are established with a company, it is often possible to keep your cash flow moving through continued invoice factoring.
Debt financing vs. equity financing
Traditional financing is known as debt financing. This is when you take a loan out, and you have to pay it back. You may be required to supply collateral (such as equipment or take a mortgage on your premises). This is financing that you take out on the promise of future income. Many banks require certain standards to be met, and this can be difficult, leaving you in a hard place in terms of your cash flow.
Equity financing, on the other hand, deals with what you already have instead of what you might make in the future. Invoice factoring is a form of equity financing. You have a concrete promise of payment for good or services. The factoring company can see that, and is willing to offer you some capital in return for the ability to collect – and keep – the money from your invoices. Instead of trying to finance for the future, you are instead using something that is already promised to you to get capital.
For many businesses, this is a very convenient way to keep the cash flow moving smoothly. In some cases, things can slow down when your business has to wait on the payment of an invoice. With factoring, it is possible to set up a system where you essentially get a “cash advance” so that you can keep the money moving through your business. Once you get set up with Advanced Commercial Capital, you can send invoices regularly for a smooth infusion of capital whenever it is needed.
Invoice factoring can put you in better control of your cash flow. You can use your expected payment to your advantage by creating a regular influx of ready capital. This can keep your personnel paid and ensure that on-time payments are made on your lease or for other necessities of keeping your business open.
Businesses need ready capital. Invoice factoring can ensure that you receive the cash you need, when you need it.
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