The Romans were the first civilization to sell promissory notes at a discount, beginning the industry of factoring. America was built largely on the possibilities of factoring, when colonial businesses were factored by Europeans willing to invest cash in exchange for the promise of large returns, and government bonds also use the same principles applied by businesses when they engage in invoice factoring.
Invoice factoring is, at its simplest, the sale of the right to collect cash owed on your outstanding invoices. Most businesses engage in invoice factoring when they need cash up front quickly, or when they have customers that are slow to pay and don’t have the resources to build an accounts collections department. Though some companies are large and established enough to get accounts receivable financing through a regular bank, it can be handy to have access to invoice factoring companies as well.
Most businesses use invoice factoring to get fast cash. In the intense and fast paced business environment of today, ready cash can be invaluable. With the sale of your invoice futures, you can get the cash today you need to capture customers that will move your business forward.
Invoice factoring is not a loan; rather, it’s an outright sale of an asset. Another way of looking at it is as a cash advance: you give up a certain portion of the money you expect to receive in the future in exchange for ready cash today. While some businesses purchase invoices outright, others give you a down payment toward the invoice, paying you the balance less their fee when they receive payment from the customer. One of the best things about invoice factoring is that your credit has no bearing on whether you are approved; instead, your customer’s credit qualifies the invoice for factoring.
Many different industries take advantage of invoice factoring, including:
- Staffing and consulting firms
- Telecommunications companies
- Service providersBecause ready cash is so important in their business, industries that are heavily vested in human services and need to be able to meet payroll are among the best able to leverage invoice factoring. However, any business that generates at least ten thousand dollars in accounts receivable should be able to use invoice factoring, provided they’ve acquired creditworthy customers.
Other situations that might make invoice factoring a wise choice for you include:
- A young company with creditworthy customers, but not sufficient credit history for your own business to be considered creditworthy by banks
- A company with the necessity of taking advantage of new, time-limited sales and profit opportunities, but inadequate cash flow currently to do so
- Companies with income, credit, or tax problems
- Companies that have filed for bankruptcy, but that stand to turn a profit
- Companies that are growing too rapidly for ready capital to keep up with business needs
- Companies poised to grow very soon but do not want to incur debt
- Companies that are growing rapidly, but do not have good enough credit to take out bank loans.
- Start-up companies with no capital base currently
- Companies with seasonal sales patterns or uneven sales patterns