Invoice Financing: The Best Solution for New Business Loans
One of the problems facing a newly formed company is that lending institutions are particularly hesitant to make new business loans. New businesses are notorious for closing at almost the same rate as they begin trading; they often lose money in the first few years. Once a business is established, obtaining loans is less of a problem, but until then new start-ups generally have to rely exclusively on internal funding. However, an alternative to business loans, known as invoice factoring, makes obtaining new business loans unnecessary.
Invoice factoring, also referred to as invoice or debtor finance, involves a lender, the factor, paying a percentage of the value of a company’s sales invoices upfront and collecting the debt from the company’s clients. After receiving payment, the factor then reimburses the company with whatever monies are left after deducting the upfront payment and any interest and charges.
In this way, rather than repeatedly having to apply for new loans, the company receives monies to cover its operating costs in a predictable and continuous manner, with the lender using the invoices as a form of collateral. The company has a regular cashflow and saves money on the billing and collecting of accounts receivable, because the job is taken over by the factoring company. Friction between slow-paying clients is eliminated by allowing a third party to handle collections and the company is able to concentrate its efforts on building a strong customer base, rather than spending time on credit control.
