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How does Small Business Invoice Factoring Work?

Author: Stephen Perl
by Stephen Perl
Posted: Aug 04, 2015
invoice factoring

A business gets approval for invoice factoring on the basis of the credit history of its debtors. First, the debt factoring company would analyze the financial capability of the customers to determine the degree of risk involved in granting a loan to your company. To ensure that the factor doesn't end up with unpaid bills despite giving your firm the money, he will take only those invoices that have a decent repayment history. Once an invoice has been approved by the lender, you can get cash against it within its 30 to 60 hours. Many online financing companies providing invoice factoring promise to provide cash within 24 hours of the invoice approval.

You hold the freedom of controlling the number of invoices to be given as collateral.

One of the most common type of invoice factoring is spot factoring. In this, the factoring company sets a minimum bill amount because they are only assured one transaction. No upfront fees will be charged as the company understand your requirement of funds. The process of spot factoring involves the following steps:

  • the company completes an order and prepare a bill for it
  • the factor is also sent a copy of the invoice
  • the debt factoring company reviews it, does a credit check on the customer and does the verification of the invoice
  • once verified, the lender company gives 70 to 90 percent of the invoice in advance
  • the remaining balance is given after the complete collection of the payment
  • the company charges the factoring fees from the balance

While it is true that invoice factoring brings you quick cash to meet the immediate expenses of your organisation, it also brings along some cons that, as a businessman, you should not ignore.

  1. Taking an invoice factoring might send a negative signal among your clients and partners as it is often considered the final resort taken before bankruptcy. This could hamper your market reputation.
  2. When calculated on an annual basis, the total interest that you pay exceeds 30 percent of the total loan amount. It is approximately three times of the interest charged by the bank.
3. Despite of good relations and understanding, you tend to lose those customers that have been given credit rating by the factor.
About the Author

In 1985, 1st PMF Bancorp was founded as a family run lender providing factoring, but as our clients’ businesses expanded globally.

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Author: Stephen Perl

Stephen Perl

Member since: May 18, 2015
Published articles: 9

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