Business factoring is one of the best alternative ways for growing businesses to get working capital quickly. Factoring is a form of business funding where the company sells part of its account receivables to factoring companies called business factors. The factoring firm lends the borrowed part of the invoice and collects payments for the whole invoice amount. Then, the factor sends the business a reminder of the invoice after deducting the fees.
How does factoring work
The business factoring company meets with you to assist in evaluating the business’ cash requirements. A form is completed, and a processing fee is charged. Within a couple of days, the factor completes its due diligence and review account receivable before funding.
The factoring company buys collectable receivables for work that has been completed, delivered and invoiced. Usually, the factor advances money to your business for 60-85% of the total value of the invoice.
Your company gets instant access to money without waiting 30-90 days for the invoices to be paid. After the approval, you might get the financing within 24-48 hours.
The business factors are reimbursed by collecting the business’s invoices.
What’s the purpose of business factoring
Business factoring is utilized to temporarily alleviate any money problems for businesses. In most cases, factoring is used as a stepping stone to help a company take advantage of growth opportunities. After your financial state makes your business bankable, you might qualify for other forms of long-term lending.
Whatever you spend the money on will depend on your unique condition, but commonly it’s used to leverage the advantage of vendor discounts, purchase new equipment, maintain inventory levels, make payroll, procure materials, pay taxes, upgrade hardware, invest in marketing, among others.
Basically, the money you get from a factor can be utilized for anything that will keep the company advancing.
Who qualifies for business factoring
Typically, any business that wants to bridge the cash flow gap can qualify for business factoring. Your business is ideal for factoring if:
- There is rapid growth and a need for instant cash to meet clients’ fast-growing demand
- It’s a start-up business that requires cash but does not qualify for other forms of lending
- Your business is recovering from financial difficulties and has orders to fill to get back on its feet
- Your business prefers not to relinquish equity and control to its investors
- Your business is in medical services & supplies, manufacturing, high-technology services, and temporary staffing, among others.
What it means by closing the cash flow gap
Cash flow can break or do a business. The truth is that 80 percent of small and mid-sized businesses that close down go through that because of poor cash flow visibility. So, understanding the cash flow gap is important as it can assist you in understanding your business cash flow problems. The cash flow gap is the duration between the business’s payment for services or materials and its receipts for sales made.
There are some stressful moments when your bank account balance is zero after paying the expenses while waiting for the sales and invoices to hit.
If your business is experiencing rapid expansion, it might end up in bankruptcy because cash outflow surpasses the inflow for a long time.
Reasons to consider business factoring
If a lack of working capital is stopping you from making sales or holding onto important customers, business factoring might come in handy. Pay attention to this:
- Does the gross margin on the next sales greater than factoring costs
- Can you save through competitive credit terms, trade discounts and reduced administrative and collection fees to offset the factoring costs?
- Will accepting new businesses and keeping them by business factoring improve the bottom line?
- If the answer to these questions is yes, then you should consider business factoring for instant cash.
Should you consider business factoring?
Many business owners use business factoring to secure money without applying for a loan. However, how can you tell if business factoring is ideal for you? Consider the following:
- Reliability and creditworthiness of your clients
- Your personal or business credit rating
- The number of unsettled invoices and their amount
Not that not all funding solutions work well for small businesses. Even though business factoring might be perfect for some, it might not work for some businesses. So, it’s important to explore various types of loan alternatives before making a decision. There are numerous business factors in the market. so, make sure you choose a reliable service provider.