Factoring is a type of finance where a company sells its account invoices to another company at a discount. Companies opt for this form of financing whenever they experience cash flow problems due to the failure of clients to pay on time for the goods delivered or services rendered. In the case of a contractor, this means that if you complete a job for a client but they do not pay you for this service for over 30 days, you can get a cash advance on this invoice so that you can continue to take other jobs and grow your business.
Each time the seller sends an invoice to his customer, the factoring company pays the seller at least 70 percent of the invoice value within 24 hours. The remaining amount will be paid once the customer has paid the invoice in full. In this case, the customer does not make the payment to the seller but the factoring company.
Invoice factoring is one of the forms of financing that allows you to grow your business over time without the involvement of complex credit committees or time limits. As a contractor as long as you continue to provide quality services to creditworthy companies, a factoring company can finance your business against eligible invoices within the shortest time possible.
There are several other services that factoring companies can provide to contractors. This includes providing well-detailed reports because many businesses lack a qualified in house bookkeeper who can compile transactions in an accurate and timely manner which allows business owners to adequately assess their business growth. Additionally, factoring companies can guarantee their customers credit protection against non-payment resulting from customer failure to make payments promptly or when a customer is unable to pay for the goods delivered or services rendered. Most businesses are unable to seek credit protection because of the high premiums it comes with. These credit protection services are available to their clients at reasonable rates.
Overall, contractors can sit and relax, knowing that there is cash in the account to cater for salaries and other expenses. It is understandable why invoice factoring is becoming more popular amongst business owners looking to expand their businesses but have access to limited capital, especially when other sources of financing involve complex procedures that discourage business in their pursuant.