How Factoring Can Raise Money For Your Business

If your business needs a quick influx of capital to expand, purchase more inventory, or pay off some outstanding debts, you may want to consider hiring a factoring service.

What is Factoring?

Factoring, sometimes known as accounts receivable financing, is a process where an existing business sells their customer invoices to a third party called a factor. The factor collects the full amount of money owed on the outstanding invoices and keeps a percentage of the payments for their fee.

When a business owner factors a payment invoice, the factor service gives the owner a significant percentage of the customer’s invoice value upfront, usually by the next business day. The amount of money you will receive as an advance from a factoring agent depends on many variables, such as the factoring service’s percentage rate, your type of business, even your customer’s credit rating.

A factoring service does not operate in the capacity of a bill collector. Instead, the factor waits the length of time for the invoice to come due and then collects the money. If the customer is delinquent, the factor takes no action.

Two Types of Factoring

The first type is recourse factoring and is the most common. With this service, you will be required to pay back the advance money if a customer doesn’t pay their invoice to the factor.

The second type is non-recourse factoring, and it is the more expensive option. With this service, you are not required to pay back the advance money if the invoice is not paid by the customer.

What Are the Advantages of Factoring?

The most obvious reason to use a factoring service is you will get your money quickly. When you send out invoices to customers for products or services, your payments may not be received promptly. If this continues over time, the situation can create a serious cash-flow shortage for your company. Such a lack of funds can hamper your ability to pay bills as well as buy the supplies needed for your business.

If you sell your products or services in large orders to bigger companies, they may ask for invoice terms of 15 to 30 days. Most small companies allow these terms because they get much of their business from the large companies. However, that long wait for payment may not be advantageous for a small company’s cash flow. So factoring could bring financial relief to such a situation.

Using a factoring service to manage your company’s collections can save you a lot of time that could be spent more productively elsewhere. Since you are not taking on new debt by using a factoring service, the increased cash flow can help your company to grow at a faster rate and expand operations.

You can factor all of your customer invoices or only the orders with the longer payment terms. A factoring service can accommodate whatever plan fits your company’s individual needs and can set up your account in just a few days.

Be Sure to Investigate:

Factoring may seem like a good idea to raise cash in the short term for your business, but it doesn’t come without some risks. It’s a good idea to investigate the reputation of a factoring service before you engage their services. When negotiating with a factoring service, make sure you understand the fee structure and any other costs that may be involved. The best way to find a trustworthy factoring company is to ask business associates for their recommendations.

“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you make it!” – John Dessauer

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