I thought I would go through the basics again as it’s been a while and some people reading this blog would just like to find out how it works quickly.
Most business to business sales carry 30 to 60 day payment terms. This means that as a supplier, you must deliver your products or services now. However, your client has between 30 to 60 days to pay you.
The problem is simple. Your clients want to pay you in 30 to 60 days, but you must pay rent, payroll and your suppliers now. Unless you have a lot of cash sitting in your bank account, this leads to an almost impossible situation.
Factoring is a tool that helps business owners who cannot afford to wait 30 to 60 days to get paid by their customers. Factoring provides you with the necessary funds to pay wages, make rent and pay your suppliers on time.
As opposed to bank financing, factoring is easy to qualify for. The main requirement is that your business has a strong debtor list of clients. For the factoring company, your best collateral is the invoices from your strong customers.
Factoring is also easy to use. It enables you receive up to 80% of your invoices within a day of invoicing. It reduces the time you wait to get paid from 60 days to 1-2 days. The transaction simply works by the factor giving you 80% in the first instalment and then pays you the remainder of the invoice once your customer pays less a small fee for the service.
Invoice factoring is an ideal tool for companies that are growing and that cannot afford to wait to get paid by their clients. It helps you to take on more opportunities and prevent the usual stresses of day to day operations for cash flow.