Technology is ever-changing and so is the structure of IT companies. To stay updated with the latest technologies, the companies require the best applications of strategies. To function seamlessly, any business requires a stable source of working capital. However, the slow-paying of customers and other factors can impact a company’s working capital or cash flow. To save companies from such hassle, many agencies provide factoring for tech business. It is a service dedicated to tech companies, helping them get funds to pay bills, make payroll, and take on new customers with ease.
Invoice factoring gives the companies endless opportunities to cover their business expenses. With the help of this service, tech companies can see their businesses grow flawlessly. Here are some areas in which invoice factoring can help the companies.
- Managing Payroll Expenses
- Managing Operating Costs
- Technology and Software Upgrades
- Managing Marketing Costs
What is Factoring?
For tech companies, factoring is a solution to getting payments faster than usual. Tech companies can opt for this service to get advance cash from factoring companies and run operations smoothly. All they need to do is sell their outstanding invoices to a factoring company in exchange for advance cash.
In the information technology industry, staying ahead of the competition is a challenging factor. By providing a reliable source of working capital, factoring can help tech companies achieve excellence. The tech companies can fulfill orders and provide services without worrying about the upfront costs.
To opt for tech services, a tech company has to be eligible. The eligibility does not depend on the company experience. This is why many start-up tech companies can grow their business by partnering with a factoring company. Most factoring companies provide service to below tech companies.
- IT startups
- IT consulting
- App development
- Website development
- Software development
- Database development
- Online marketing firms
- Technology sales
The Process of Factoring:
An invoice factoring involves four main components and these are:
- A business
- Its clients (debtors)
- One or more outstanding invoices
- A factoring company (the factor)
The process of invoice factoring for tech business starts when a tech company sells its products or services to its customers or another company. Tech companies should prepare invoices due in 30 to 90 days. The next step is creating an account with a factor. Then, the tech companies present their outstanding invoices to the factory. Based on the agreed percentage, the factor provides an immediate cash advance. When the customers pay the companies, the payment is deposited into a temporary reserve account. The factor finally deducts the fees and amount advanced to complete the process.
Here is an example of how factoring invoice plays a vital role in growing tech businesses.
John’s business delivers the product to ABC Company and issues an invoice for $1,000. They agree to pay within 30 days. Now, John’s company creates an account with a factoring company. They make another agreement stating that John will pay the factor 80% advance rate and 2% factoring fee every 30 days. As a result, John’s company sells the outstanding invoice to the factor in exchange for an advance of $800. Within 30 days, the debtor pays the bill to the joint account opened by John and the factor. Finally, the factor deducts $20 as a factoring fee, $800 as the advanced fund, and sends the remaining balance of $180 to John. This is how successful invoice factoring should work.
Who is Eligible for Invoice Factoring Services?
This service is available exclusively to B2B operations. It does not matter whether a B2B company is a growing startup, a small business, or an established organization.
B2B companies, who sell their products or services to businesses or the government are eligible to opt for invoice factoring. Big companies from the staffing, trucking, freight, transportation, construction, and manufacturing industries have taken up this opportunity to outshine in the past few years. They have set an example for the blooming start-up businesses across the globe. Though factoring service follows similar terms and conditions, one must read the contract well before hiring factoring for tech business. The cost of invoice factoring varies depending on the sales volume and the creditworthiness of companies.