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All You Have To Know About Invoice Factoring For Small Businesses

To beat competitors and make products or services more attractive, many businesses sell on credit terms, allowing their clients to pay for the goods sold on a later date. This practice is commonly used for transactions that involve large amounts of money or a long shipping process.

For well-established businesses, waiting for payment is usually not a problem. They tend to have enough cash to cover their expenses and continue functioning normally in the meantime. However, many small businesses cannot afford to wait for payments, they need cash as soon as they deliver the product but they also need to stay competitive by offering flexible payment alternatives.

The solution? Invoice factoring.

Invoice factoring is a type of financing and an excellent cash flow solution for small businesses. This is how it works:

Invoice factoring is a method of financing in which a business sells its invoices (accounts receivables) to a factoring company. The factoring company advances a substantial percentage of the original invoice (usually between eighty and ninety percent) in the form of cash immediately after the invoice is sold. Then, when the client eventually pays for the goods they received, the factoring company releases the remaining balance minus a factoring fee. In other words, invoice factoring allows a small business to get cash right after they’ve made a purchase, even if the client has agreed to pay later on.

About the factoring companies: Who provides invoice factoring services?

On one hand there are the traditional financing institutions such as banks, credit unions, loans associations, and some insurance companies. The process is very similar to taking a loan, requiring endless paperwork as well as high collaterals, apart from the account receivables themselves. For most small businesses, it might be a challenge to comply with all the requirements.

On the other hand, there are accounts receivables or invoice financing companies. These companies tend to be privately owned firms that specialise in the area and are used and willing to work with small businesses without requiring major guarantees of payment or locking them into long-term contracts, regardless of their credit scores. This is undoubtedly the way to go for small and medium-sized businesses.

Investors in Velotrade, for example, are professional investors who come from a variety of industries and backgrounds, thus allowing for a steady and continuous flow of financing.

Costs of invoice factoring services

Both the amount of the initial cash advance and the factoring fees vary depending on the factoring company, the creditworthiness of the debtor, and the length of the commercial relationship.

You can, however, use Velotrade’s fees calculator to get an idea of how much it might cost you to sell your invoices using our services.

Eligibility Criteria: What kind of small businesses can sell their invoices?

Similarly, the requirements are different from company to company. In our case, small businesses qualify for financing if:

  • They are an incorporated company in business for at least 12 months,
  • They sell on credit terms,
  • They have a turnover of over 1 million US dollars,
  • The buyer has a stable credit history,
  • The buyer has been incorporated and in business for at least 36 months, and
  • The buyer generates a turnover of over 3 million US dollars.

If you meet the minimum criteria, then the process is fairly straightforward and it can be done online; you will get access to accredited investors ready to provide funding.

Cash flow is king

Cash flow makes businesses run. It allows them to cover overhead costs, day-to-day expenses, buy assets, and expand their operations. Selling on credit terms keeps companies competitive, but it might also put their stability at risk by obligating them to wait months for payments.

If you manage a small business and are facing cash flow issues (or want to avoid it), get in touch with us. With Velotrade, SMEs receive advances on their outstanding invoices, making it easier to further expand their business.