Accounts Receivable Factoring allows you to access the money you’re owed, via a flexible funding and collections service which releases up to 85% of the cash tied up in outstanding invoices, with credit control and sales ledger management as part of the factoring services. By chasing invoices and collecting payments, the factoring company frees up your time and cash flow so you can concentrate on running your business.
How Does Factoring Work?
Factoring is a finance tool designed to allow businesses to access cash quickly so that they can use it to operate and expand their businesses. One of the most attractive features of factoring is that it is actually not a business loan; it is an advance payment based upon invoices or accounts receivable owed to the business. The process of factoring is quite simple; first, the factoring company purchases an invoice from your business at a discount. Next, the factoring company will work to collect the invoice payment. Once they have collected the business payment, they will pay your business the rest of the amount owed. The fee that the factoring company charges will vary based on the volume of business that you do with them, the length of time that the invoice takes to be paid and in some cases, the credit of the company that owes your business money.
Benefits to Your Business
When a business is evaluating available financing options, the process can become overwhelming. Also, if the business does not have established credit or the business owner does not want to cosign on the debt, there are very limited financing options available. Factoring is not considered debt to the business and is not a form of a business loan. In fact, factoring companies are not concerned with your business’s debts; they are only concerned with the credit worthiness of the company that they are buying the invoice for. With this in mind, factoring is a great strategy for companies that are not only new, but those that have a short track record, weak financial statements or who cannot get traditional financing.
Another major advantage of factoring is that your business can receive cash flow earlier, typically in 1-2 business days rather than waiting for your customers to pay their invoices. While you are paying a nominal fee for the factoring services, the process speeds up, allowing you and your business to leverage those dollars to grow your business.
Factoring companies are also generally more effective at collecting payment for invoices as they specialize in this and have the dedicated resources to focus on this task. In comparison, your small business may not have those resources allocated to collect your invoices as efficiently or effectively.
Here are some additional benefits of factoring for your business:
Early Payment Discounts: With factoring, you will be in a position to pay your own invoices early, possibly being able to take advantage of early payment discounts.
Build your Business Credit: By paying your bills earlier, you will be helping your business to build its credit with other businesses and important vendors.
Flexibility: Many factoring companies do not require you to factor all of your invoices. This will allow you to choose the invoices that you would like to factor; for example, if most of your customers pay quickly, you will only want to factor invoices of customers that are slower to pay. Also, you would want to focus on larger invoices for factoring as you may have depleted cash flow to fulfill those larger orders; cash flow earlier will help you to gain the much needed profits on these larger sales.