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What Is Invoice Factoring And Invoice Discounting?
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:
* Transportation * Manufacturers * Distributors * Wholesalers *
Staffing and consulting firms * Telecommunications companies *
Service providers
Because 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
About the author:
Henry Byers, Invoice
Factoring advisor - focusing on Accounts Receivable
Factoring and Factoring
Financial Services
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