The Different Lending Options That Use Your Invoices As Collateral
When you send an invoice to your customers, you must wait the length of the payment terms to get your money. This can be an issue if you want to make improvements to your facilities or hire more staff to work for you. You can use the bills that you send to your clients to get cash immediately and take care of your projects when you need to. Here are the differences between financing and factoring.
What Happens When You Get the Financing
When you submit your paperwork for invoice financing, you will offer up the bills that you have sent to your clients as collateral for the loan you requested. If you are approved, the bank will give you a percentage of what they are worth. Once your customers pay you, you can rectify the money you borrowed. If you choose factoring instead, you will sell the debts that are owed to you to the company you want to work with. They will pay you for them then reach out to those who buy from you to settle the debt. You will get an agreed-upon portion instead of the entire dollar amount.
Applying For Lending
When you determine that you want to use invoice financing, you will need to submit an application for approval. Compile your financial records as well as several statements that show the credit card payment you have processed from your customers. The financial institution will need an updated credit rating from you before they can loan you the money. Once everything has been processed, you can choose which debts you want to use as collateral.
However, if you choose to use factoring instead, you will decide on a company to work with. Once you agree on the terms of the contract, you will turn all of the bills owed to you to the organization. They will pay you the percentage you accepted from them, and they will contact your clients for you.
Working With Your Customers
Your relationship with your clients can be intertwined with your decision to use these types of lending. They will be unaware of your plans if you use invoice financing. You will still collect on the bill, and it will be used as an asset towards the loan you take out. When you use factoring, however, they will know that you are working with another organization. This group will be the ones asking for payment and collecting the money. Speak to your customers and be sure they are comfortable with this agreement before you continue.