When it comes to addressing cash flow issues in a business, factoring invoices is often a very simple answer to what may seem like a very complicated problem. Unfortunately, many small to large businesses don’t take advantage of the option because they simply aren’t aware it exists, or they have been provided with misinformation about the process.
To help any small business owner, we would like to address some of the common questions we hear about factoring and how it benefits businesses. While it is not the only solution for some businesses to consider, it has advantages for businesses over traditional bank loans and other types of financing options.
There are differences between companies offering factoring services, but the general process is the same. Your business will sell accounts receivables to a factoring company for cash. The factor provides a percentage, up to 80%, as an initial deposit into your bank and holds a small reserve, typically 20% until your customer closes the invoice.
The company that is factoring invoices then deducts the fees and provides the balance of the reserve into your account. The factor also assumes all the management of the account, including collections, and provides additional financial services to meet your needs.
The credit score of your business, or a personal guarantee, is not needed as the factoring company uses the creditworthiness of your clients to approve the application. As you grow and have higher value accounts receivable, the factoring will also incorporate this increase, giving your company maximum financial freedom.
The Difference Between Factoring and Loans
Factoring is not the same as a loan as there is no borrowing involved. Instead, the factor is advancing you the funds on work, services, or product that is already invoiced to your customer.
As we have already mentioned, this eliminates the need for your company credit to come into the approval process. Additionally, since it is not a loan there is no repayment and no interest, and the cash is in your account within days of approval.
This is also very different than a short-term business loan that will immediately result in daily withdrawals to repay the loan and interest. When factoring invoices, the money you receive from the factor is yours to spend on payroll, equipment, supplies, or overhead, there are no strings attached.
Companies and businesses in all industries use factoring companies to address cash flow shortage, to take advantage of new opportunities, and to provide funding in times of growth. As a recognized, cost-effective option for businesses of all sizes, factoring is an important financial tool to consider.