Are you a service company? It may seem like a simple question. If you offer services for a fee, then essentially you are a service company. And if you need extra funding, then perhaps invoice factoring is a viable choice.
How Does Invoice Factoring Work?
In many cases, when you offer a service, sometimes your client is a company that doesn’t pay right after you’ve completed the work required from you. You then issue an invoice instead which determines the date when the client should pay what it owes you. Usually payment is due in 30 days, but sometimes it can be longer.
With invoice factoring, you engage the services of a factor in lieu of a lender. The factor takes in your invoices and then advances you about 80% of the value of the invoice right away. When your client finally pays the invoice, you then get the rest of the money from the factor after the factor’s fees have been deducted.
It’s a fairly straightforward process, although there are variations. For example, it can be a continuing process involving all your invoices. Or perhaps only a few select invoices are involved, and it may even be a one-time transaction.
Benefits of Invoice Factoring for Service Companies
The most obvious benefit of invoice factoring for a service company is that your company gets the bulk of the payment right away, which can then be used for working capital. This is the money you can use to pay for your overhead and utilities, cover the payroll, and buy or maintain equipment and supplies. You won’t have to wait for a month to get the payment from your clients and as a result, your working capital won’t get depleted.
In addition, you get the approval for the invoice factoring service quickly, unlike when you apply for a bank loan and the entire process takes too long and the requirements are too stringent.
With invoice factoring, factors tend to focus on the ability of your clients to pay, so your own credit rating is usually immaterial. And because of this, the approval rate for invoice factoring is much higher and the approval itself comes more quickly. It’s not strange to get the approval within a matter of days.
So if your business is in dire need of money, invoice factoring will ensure you get your funds fast.
As a service company, you may realize that the services of a factor can also help streamline your business as well. For example, in most cases the factor takes over the collection of the payment. This can be a definite advantage because it frees your service company from having to establish its own collections department. At the very least, you spare your current employees from having to contact clients and collect the payment from them.
Another benefit of invoice factoring for a service company is that the factor can tell you which of your potential clients have a good history of paying in full and on time. This can save you from doing actual work for clients who don’t pay on time.