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Accounts receivable factoring (or invoice factoring) can be a viable way to get cash quickly for your business. Basically, it is a financing agreement in which you use your unpaid customer invoices as collateral for a cash advance provided by a factoring finance company, rather than wait the 30-90 days to receive payment from your customers. The factoring company will then collect your invoices on your behalf, taking a fee for the advance and their work.
If you’re interested in borrowing from an invoice factoring lender, get started with the following steps:
1) Locate factoring company options: Locate bank or non-bank lenders that offer receivable factoring. Look over their financing agreements, paying particular attention to how much of an advance you get, fees (be on the lookout for hidden fees!), commitment length, required minimum number of invoices, industries and locations the factoring company services, and their customer service performance.
2) Select your lender: Use the aforementioned areas to determine which receivable factoring lender will be the best fit for your business. Not only do you want to seek the best terms and fees, but also remember that the company will be reaching out to your customers on your behalf to collect your invoices, so be conscious to pick one with a strong track record and good customer service.
3) Gather application documentation: Once you choose the company with the most beneficial agreement, gather the necessary documents to apply. This type of funding is designed to be fast and easy to apply for–so there is less documentation to assemble as compared to traditional bank loans, and typically neither a credit check nor collateral is required.
4) Apply and await approval: Submit your receivable factoring application to your selected lender. Approval can be in as little as 24 hours.
5) Submit invoices: Once approved, submit unpaid invoices to your selected financing company for collection.
6) Receive your cash advance: In turn, the company will deposit a cash advance (usually 80% of the invoices, but the percentage depends on the lender) into your account. The remainder of the invoice will be held. It is from the remaining balance that the financing company collects the factor fee (which depends on the time it takes for the invoice to be paid) and any other fees mentioned in the agreement.
7) Invoice collection: The company will contact your customers on your behalf and collect the invoiced amounts due to your business.
8) Collect balance of invoice payments: The financing company will pay you the balance of the invoice owed to you from the initial cash advance, minus applicable fees they’ll keep for their services.
Receivable factoring can be a valuable option for a business that needs a cash advance, or may not want to expend personnel and time to collect on its own invoices. If you think it’s a fit for you, understanding how it works and how to get started will help you move forward to implement this financing tool for your business