Your business needs a quick infusion of cash. At the same time, you’re struggling to collect on the money that your current clients or customers owe you. Sound familiar? If it does, your business might be an ideal candidate for invoice discounting, also known as invoice factoring.
Invoice or accounts receivable discounting is a type of short-term borrowing that companies can use to improve both their working capital and cash-flow. Basically, businesses borrow the money from their unpaid invoices before their customers pay them. They work with an invoice factoring company to achieve this. When the actual organization finally receives the money from these unpaid invoices, they can use it to pay back the short-term loans they took out.
In most instances, businesses enter into arrangements with finance companies to handle the invoice discounting. These finance companies will charge a monthly fee handle the transactions. Most businesses borrow from 80 percent to 90 percent of the value of their unpaid invoices.
There is an obvious disadvantage here: Because your business will be paying a fee to a factoring company, it is spending money it wouldn’t have to spend if it simply waited for the customers to pay their invoices. But there’s an advantage, too: Small businesses often struggle immensely with cash flow. When rent is due, there simply aren’t a lot of liquid dollars on hand, say. With invoice discounting, businesses gain access to a readily available stream of cash. They can use it to pay their bills or to invest in their produce or service line.
For many businesses, invoice discounting is a financial safety net. It guarantees that there is always money available to pay the bills and to meet payroll. It takes much of the uncertainty and stress out of running a business. After all, it’s no fun to constantly worry about your business’ ability to pay its bills. Take a long look at invoice discounting; you might find that it’s the perfect tool for your small business.
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