Financing Invoices With Factoring
A business that provides a service to customers will receive payment through invoices that the business sends to its customers, but the problem is that often, a business cannot afford to wait for an invoice to be paid, and unfortunately, many invoices are paid late, often 60% of them. However, a company such as a shipping company has its own expenses to handle, so to get money faster, they will make use of another business that works with invoice factoring. This is a sort of funding receivables services, and if a client company such as a shipper or carrier gets funding receivables from invoice factoring services, then their finances are secure. This business to business partnership can be greatly beneficial to both parties involved, and funding receivables work is often a major factor in keeping a business afloat while it waits for invoices from its customers to be paid.
The Work of Funding Receivables
What are factoring services? How does it work toward funding exports and the like? It is when a service company such as a truck carrier provider renders services to its customers and then demands an invoice, and invoice factoring companies act as a sort of lender to the business that sent the invoice. After all, a service company may have a great deal of overhead like truck maintenance, fuel, workers’ pay, rent for land occupied by their facilities, and more, and sometimes, they will not have time to wait for an invoice to be paid, which can be 30 or 60 days away even if paid perfectly on time.
This is where funding receivables services play an active role. In this case, they will work for the service company, which is the client company, and they will pay that client company a large percentage of the invoice’s value right away in exchange for collecting 100% of the invoice’s value when the customer is ready to pay it. In this case, the client company gets a large portion of their invoice’s value right away, and they can use this money to pay for overhead, pay their workers, buy new equipment, or anything else that needs funding sooner than later. The invoice factoring company, meanwhile, will wait until the customer pays the invoice in full, and when this happens, the factoring company pays another small percentage of the invoice total to the client company, up to about 95% of the grand total. The remaining percentage is the profit that the factoring company makes from this whole deal. In this way, the client company exchanges a small percentage of the invoice’s total for the convenience of getting most of the invoice’s value right away, and this can be critical with time-sensitive expenses waiting to be paid.
This is a sort of lending service, so a funding receivables company may choose to work with client businesses who have a better business-to-business credit score. Unlike private credit scores, which go up from 300 to 850, a business credit score scale ranges from 0 to 100, and a business may want to work hard to maintain its credit ranking so that factoring companies will be willing to work with them. After all, a U.S. Bank study has determined that 82% of companies that fail are ruined by cash flow problems, so making good use of invoice factoring can prevent this complication. Many small businesses that do not have deep treasuries may choose to make use of factoring, seeing how they do not have huge reserves or loans to fall back on while they are waiting for an invoice to be paid in full. In fact, it has been determined that 99.7% of all business in the United States is conducted by small businesses (which are defined as having 500 or fewer employees). All of these small businesses want to succeed, of course, so the ones that rely on invoices for their income may want to establish good business credit and reach out to funding receivables companies, especially when they are first starting out, to make sure that they always have cash on hand for their expenses. A startup business may not have the capital to wait for invoices to be paid in the normal time frame.