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How Does Invoice Factoring Work?

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Many businesses have to plan meticulously to meet their cash needs. Depending on your collection cycle, you may have invoices that are due to be paid 30, 60, or even 90 days after they are issued. In the meantime, you still need funds to order materials and pay your employees. One way to bridge the gap between doing the work and getting paid is to use invoice factoring in Cumming, GA.

What Is Invoice Factoring?

So, how does invoice factoring work? Invoice factoring is a simple process. Instead of keeping up on the invoices you send out and collecting payments from your customers, you can sell those accounts receivable at a discount to a factoring company. When you issue the invoice, you send a copy of it to the financing company. They release funds to your business right away, allowing you to pay your employees or purchase materials.

The factoring company takes over the invoice collection process, so you don’t have to take up your valuable time chasing for payment. Your client pays the factoring company the amount they owe on the invoice. Invoice factoring is a great way to raise immediate cash because you’re selling an asset instead of getting a loan. The factoring company will consider your customer’s creditworthiness instead of yours when they determine how much you get paid. Your chances to qualify for invoice factoring increase when you have established businesses as customers.

How It Works

After you set up an account with an invoice factoring company, you send them a copy of an invoice. Their team will ensure that the invoice is valid and that nothing prevents it from getting paid. Once the invoice is approved for factoring, your company immediately receives a substantial portion of the invoice due, often around 80 percent. Some companies even pay within 24 hours. The rest of the invoice will be paid once your client pays the invoice factoring company. The financing company will retain a portion of the invoice for their fee once it pays. You can use invoice factoring for one, several, or all your invoices, but some financing companies require a minimum volume.

How Your Company Benefits

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The most obvious benefit to invoice factoring is that you can meet your immediate cash needs. However, there are other benefits to selling your accounts receivables. One, you can reduce the staff in your accounting department responsible for credit management and payment collections. This can save you a substantial amount of money. Two, you don’t have to deal with the hassle of continually chasing customers for payments. Three, invoice factoring is one of the best ways to raise cash, because you don’t have to go through a lengthy loan approval process that is often dependent upon your credit score, the length of time in business and the profitability of your company.