Finding Funds With Factoring
Many business owners provide services or products to customers, and then have an aging period on their invoices of 30, 60, or 90 days. While this is a standard procedure, those aging periods can frequently cause a strain on cashflow when a business is trying to grow. Sometimes customers are delinquent in their payments, causing a business to devote time and resources to track down the money they are owed for services rendered. Recently, business owners have been turning to factoring in order to offset aging or delinquent payments, and maintain a steady cash flow.
How does factoring work?
With factoring, a business sells their invoices to a factoring company in exchange for instant cash. The factoring company typically pays an amount for a total volume of invoices, minus a percentage (usually up to 20%) as their fee. Your business gets funding, and the responsibility of hunting down payments from customers is transferred to the factoring company. In essence, a business is getting the working capital they need, and the fee the factoring company charges is for the waiting period and any potential headaches they encounter when trying to get payments from your clients.
Advantages of factoring invoices
In addition to the aforementioned advantages of instant capital and reduced responsibility, factoring is attractive because – unlike conventional financing – a company does not come with a payment schedule, a need for collateral, or a long waiting period for approval. Most factoring companies can arrange an agreement within 24 fours. One of the best advantages is that factoring can work for almost any business model, from large-scale manufacturing to small service-based businesses, and even home-based operations.
How much should a business rely on factoring?
This is actually a matter of taste. Some businesses only work with factoring companies to handle delinquent customers, while still keeping a steady cash flow. Other businesses only use factoring on large customer orders that have an aging period or installment plan in order to get immediate access to the money they are owed. However, where factoring was once only used in specific instances, many business owners are turning to factoring to keep a constant cashflow by selling their invoices. This works very well in organizations that have a steady volume of sales.
How can the funds from factoring be used?
The short answer is that factoring money can be used for just about anything. Unlike many conventional loans, where the funds have to be allocated for specific things, the money a business gets from working with a factoring company can be used for payroll, to offset the cost of internal projects, to buy new equipment, expand office space, or to lease equipment. In a sense, the money from factoring is the same as regular revenue – only faster – so business owners can utilize it as they see fit.