Timing is everything in business. Being able to jump on an opportunity in a short window of time can be the difference in landing a new contract and missing out on a sale that could propel your business into new markets. Having the cash you need on hand to make these timely decisions may rest on your ability to take advantage of factoring receivables.
In a Nutshell
To make it very simple, factoring is the process of selling accounts receivable to a third part, the factoring service, and having the factoring service fund up to about 80% of the value of those invoices.
The factor then assumes collecting from your buyer or customer as per the terms of your invoice. You don’t have to wait for 30, 60 or 90 days. Instead, you will have access to those advanced funds with just a few business days.
Once the factor collects the full amount of the invoice their fees and costs are deducted from the withheld 20%, and your business will be wired the residual amount of that withholding.
When to use Factoring
As a business that may have cash flow problems in that stage between invoicing and payment, factoring receivables is a good solution to the problem. This is not a loan, so there is no repayment, and there is also no restriction on how you use the funds.
You can take on new work, pay suppliers early and possibly receive discounts for this early payment, make payroll, buy more equipment or take on a new job you couldn’t have afforded without the cash on hand.
While as a business you may be able to get a business loan, this is a time-consuming process, and you won’t have the funds in days as you will with factoring receivables. Additionally, as it isn’t a loan it doesn’t require taking on more debt, and you have no interest or repayment schedule to worry about.
Finally, as a business, you may choose the option to avoid having to deal with the constant issue of management your accounts receivables. The factor will take over collections for the invoices they hold, leaving your staff free to focus on new work while they manage the accounts.
Not every business is a good match for factoring. However, for a business that is growing, expanding and taking on new work this can give you the edge to keep your company not just operating but thriving.
