Introduction
Factoring has been around for centuries, but it's only recently become a popular option for small businesses. If you're unfamiliar with factoring, here's an introduction to what it is, how it works, and why you should consider using this financial product.
Why Factoring?
You can use factoring to get cash quickly. It’s a great way to fund growth and expansion, or simply purchase inventory or finance receivables.
Factoring is flexible and can be used for any business. Companies of all sizes can use factoring to help them achieve their goals.
Factoring is a great way to get cash quickly. It’s a simple, effective solution for any business looking to finance receivables and grow its customer base.
How Does Factoring Work?
Factoring finance is a way for businesses to get paid for their invoices immediately. Instead of waiting for 60, 90, or even 120 days for your customers to pay their bills, you can receive the full amount owed in as little as 24 hours. By selling your invoices at a discount to a factoring company, they will pay you right away and collect from your customers over time.
Factoring companies are able to offer this service because they take on some risk when purchasing outstanding invoices from small businesses like yours. In exchange for providing immediate access to cash flow and taking on some of the risk involved with collecting payments from your customers (such as late payment fees), the factoring company charges an interest rate between 1% and 4%.
Does Factoring Cost Money?
You may be wondering if factoring costs money. The short answer is yes. Unlike traditional loans, which cost interest and require monthly payments for the duration of the loan, your factoring company does not charge you interest or make monthly payments on your behalf. Instead, they charge a one-time fee based on how much money you receive from selling your invoices.
The fee amount will vary depending on many factors:
The number of invoices you sell each month
How quickly do customers pay their invoices (factors like 30-day terms vs 45-day terms)
Your industry (do you have high average prices per invoice?)
Who can benefit from factoring?
Factoring is a good solution for businesses that want to grow. It can help you get the cash you need to grow your business and reduce your working capital requirements.
You can use factoring to get cash in your hands more quickly than other funding options. The process is fairly simple; you provide goods or services, and the factor buys them from you with a contract promising to pay back the money within a specified time period.
How should I choose a factoring company?
Choosing a factoring company is like choosing a mortgage lender or bank. You want to go with someone who is reputable, has been in business for some time, and offers the services you need.
If you have a good relationship with your current supplier, it may be easy for them to refer you to their preferred factoring partners. If this isn't an option for you, ask around about different financial institutions within your industry or other industries that might offer similar services as well as referrals when it comes time to choosing a factoring company.
Factoring companies also vary based on their rates and fees—and they should! The best way to compare these companies' rates is by looking at their annual percentage rate (APR). This information can usually be found on the company's website; however, if not provided there then ask them directly how much they charge per year (or month).
How do I find out if I'm eligible to use factoring?
Factoring is not a loan. You can’t use it to pay your bills, make repairs, or buy new equipment. Factoring helps you get cash now on your outstanding invoices. If you have receivables that need to be paid quickly, factoring may be right for you!
To qualify for factoring, businesses must have:
Receivables (money owed to them)
A good credit rating (so their customers can pay the invoices)
The ability to provide financial information about their business
Conclusion
If you are looking for a way to get the cash you need without having to rely on traditional methods, then factoring may be the answer. It is a fast and easy way to get approved for financing without using your personal credit score or assets as collateral. In addition, there is no cost associated with factoring unless you decide later on down the road that you want to purchase equipment or expand operations in some other way.