A company's profits are a vital part of a business, but so is cash flow. But, analysts believe that a business's cash flow is more crucial than a company's profits.
A business needs cash flowing in
faster than going out, yet this isn't always the case. So when businesses
struggle with incoming cash flow, they might turn to invoice factoring.
What is invoice factoring? If you
run a business and struggle with cash flow, you should learn what this is, as
it might be the best solution for your cash crunch.
Here is a guide to help you learn
more about invoice factoring and how it works.
Invoice
Factoring Goes By Several Names
First, you might already know what
invoice factoring is, but you might know it by a different name. For example,
some companies and people call it factoring. Others call it asset-based
lending or invoice financing.
All of these names refer to the same
service. Therefore, the way it works is the same no matter what a company calls
it.
It
Requires Selling Your Accounts Receivables
Invoice factoring is the process of
selling your accounts receivables to a company that buys them.
Accounts receivables are asset
accounts that reflect money people owe your company. Offering these accounts is
an effective way to increase your company's sales, but it can interfere with
your cash flow.
It interferes with a company's cash
flow because it sells goods or services without receiving immediate payment.
Instead, the company must wait 30 days or longer to receive the payment.
If you need to increase your cash
flow, you can sell these accounts to a factoring company. The company pays you
cash for them and handles the collections.
However, they typically do not pay
100% of their value. Instead, they pay a percentage now and the rest later.
Therefore, if you want to learn how to collect unpaid invoices, this is an
ideal solution.
How
It Works
So, how does this work? You'll be
glad to know that it's not a difficult process.
You begin by looking at the unpaid
invoices your customers owe. Then you can add them up by using an online invoice generator.
Next, you contact the invoice
factoring company to tell them you have some unpaid invoices you'd like to
factor. The factoring company reviews these invoices and offers you cash for
them.
They might offer 50% or more for the
invoices, depending on the statuses and due dates. If you agree to it, they'll
send you the money.
When your customers make invoice
payments, the factoring company receives them. Then, the factoring company pays
you the rest of the money for them, but they take out a small portion for the
fees.
What
Is Invoice Factoring?
If your company needs to increase
its cash flow, you might ask, "what is invoice factoring?" When you
learn more about it, you might decide to try it. After all, it might offer the
relief you need for your company's cash flow.
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