IT factoring is a type of financing available to IT companies where they sell a company’s pending invoices at a discount to a third-party financing company. This is especially ideal for situations where the services have already been delivered to the clients but the client has not paid. Since the company needs the money for daily operation, they will sell the due invoice to a third-party financer (which can also be a bank). The third-party will then do its due diligence and once everything is in order they will provide the cash. The client will then pay on the agreed date to the bank who will take what is owed to them and send the balance to the IT company. Below are some of the benefits of IT factoring as a financing option.
Provides Working Capital
Factoring helps to maintain a steady cash flow which is very important for the day-to-day operations of a company. It is through factoring that a company can get access to funds without necessarily having to take up a loan from a bank which could take months before it is approved. The availability of working capital ensures the smooth running of the business since they can afford their daily expenses. The interest charged can be transferred to the client so the company doesn’t even incur any expenses.
The Company’s Creditworthiness Doesn’t Matter
When it comes to funding through factoring, the creditworthiness of the company is not questioned at all. This means that companies with low credit scores or businesses that are just starting and haven’t had time to build a solid foundation can still get access to cash when they need to. The factor that these third parties will consider is the client’s creditworthiness. Once they confirm that the client has a good credit score and can be able to comfortably pay the invoice on the agreed date, then the IT company will get the funding they need.
Short Turnover Time
IT factoring provides one of the quickest sources of finance. Unlike other financing options such as loans where you have to wait a significantly long time in between application and approval, factoring provides a quicker way to raise funds. It takes about two days for the third party to conduct their due diligence and make sure everything is in order before paying for the invoice. This means that you can realistically get the money you need within three to five business days compared to a month or two as is the case with bank loans.
Keeps Balance Sheet Clean
Technically, the funding gotten through IT factoring is payment for services rendered so it is not a loan. Even when recording it in the books, it is put as accounts receivable that have been converted to liquid assets. This helps to keep the balance sheet clean which goes a long way in improving the creditworthiness of the company.
In summary, IT factoring provides a decent avenue for cash. This means the company doesn’t have to fall into debt which is good for their credit score.