Firms which are just starting out possess more than just office space and utility invoices to bother themselves with. Before they produce a deliverable which will earn income, they need to hire and pay workers, buy the tools necessary to make the deliverables and hunt for some other customers which will let them replicate this cycle. With no history of charge, these companies have little to back them up when speaking to financial institutions seeing startup capital.
Invoice factoring allows a company to continue using their everyday operations and to seek out new business without needing to be concerned about how they are going to pay for the service or product the new company needs. Called factoring, a company provides a good or service into a credit worthy business and subsequently sells the bill to a factoring firm, or variable. In exchange, the variable pays the company a proportion of their funds it is owed and sends the bill to the credit worthy firm. When the credit worthy firm pays the bill (usually within 60 days), the variable deducts a small transaction fee in the amount received and sends the residual portion to the business enterprise. Factors realize that firms which do business with credit worthy clients can utilize their customers to vouch for them. Factors know an invoice is a customer’s guarantee that they will cover the products or services delivered and by selecting businesses which work with reliable, credit worthy customers, they are almost always certain to receive a positive return on their investment.
Benefits to the enterprise
Running a company which has to wait for 30, 60 or even 90 days for a statement to be paid may stop operations as funds for new clients have to be replenished before old client funds are received. Comparable to supplying a loan to their clients, customers that have to wait funds are crippled in utilizing the monies their clients owe. Invoice factoring permits a company to acquire the money upfront on bills which have to be compensated. This permits the company to continue with its daily operations without needing to be worried about its cash flow.
Firms maintain control on which (and how many) bills are offered to the factoring businesses, hence controlling the quantity of funds they get. They could use this to boost production when required, increase strategic capital buying power and enhance their credit by always having money on hand to cover bills and payroll. They also get rid of the burden of collection expenses and win the struggle against clients who are slow to cover. By picking invoice factoring over funding investors, business lines of credit or angel investors, a company is permitted to concentrate their time on conducting their company, rather than on issues associated with money flow.