What is Invoice Factoring?
Financing your Accounts Receivable
In contrast to a business loan, invoice factoring or "invoice financing" generates cash from money that's currently supposed to be paid to your business by customers.
How does it work?
you sell your outstanding invoices to a factoring company that sends you a one time big payment, typically an amount from 70 to 90 percent of the total invoices, or accounts receivable. The benefit is you get money which can be used right away for working capital instead of waiting 30, 60, or 90 days for customers to pay your business.
Despite the fact that working with an invoice factoring company may offer benefits to small business owners, it does have some drawbacks. You should see which option is best before getting into an invoice factoring agreement.
One of them is you are liable for paying for any unpaid invoices if you have a recourse invoice factoring agreement. One way to do that is to exchanging a different customer invoice of the same amount to take care of the expense.
What if I Have a Low Credit Score?
The good news is invoice factoring isn't decided if you have a low credit score or you have a spotty history of loan payments. For the most part, the major concern of the factoring company is the payment history of your customers. So, if your credit score is below 700, 600 or less than that and your recent payments to creditors isn't on time, invoice factoring may be a good option.
What Costs will I Have to Pay?
Normally, the fee ranges from 1 to 5 percent of the total invoice amount in service fees to the factoring company. You’ll need to make a decision if the fee for getting cash in days is worth it.