Benefits of Factoring

One of factoring’s more appealing features is the “use it as you need it” funding option it provides.  Most small businesses are familiar with lines of credit—factoring, particularly invoice factoring operates in much the same way.  Once a small business has been approved by a factoring company—a process that is both quicker and easier to qualify for than traditional bank loans—the business then has the option to factor as many or as few invoices as they choose. 

So what exactly is factoring?  Factoring is one of the oldest and most widely used forms of funding for businesses, standard receivables factoring has been around for thousands of years.  In practice it works like this:  A business fulfills a customer order.  The business then invoices the customer and sells this invoice (at a discount) to a factoring company.  The factoring company provides the business with immediate cash in an amount equal to 80 or 90 percent of the face value of the invoice.  The customer then pays the factoring company directly when the invoice is due.  The factoring company then remits the balance of the invoice amount to the business, less their professional fees and interest charges.

During tough economic times, factoring can prove to be very effective in speeding up cash flow.  It provides numerous other benefits as well.   Businesses can pass off collections: Outsourcing your accounts receivable management to another company (your factor) frees up resources to focus on other more productive activities.  Business entrepreneurs can free up their working capital: Many companies have the majority of capital tied up in inventory.  Invoice factoring is great for quick financing: Why? Because it does not require a business plan or tax statements, plus factoring is a quick form of cash often used for businesses that are experiencing a cash crunch.

Many small businesses could stay afloat if their clients paid invoices on time, so today’s economy is causing business owners to rethink their operating strategies. Often firms don’t get paid immediately for delivered products or services; however, in order to sustain and grow their business, they need some cash on hand. That’s where single invoice factoring can benefit businesses, and especially those who do not get paid for 30, 60 or 90 days.

Factoring companies typically don’t expect to buy 100 percent of a client’s receivables, so there are no minimum or maximum sales volume requirements. Each invoice purchase is a separate transaction and does not form part of a portfolio lending approach. The transaction is modeled as a buy-sell transaction. It’s a great way to turn receivables into cash. Each and every client’s circumstances will vary and so this may have an impact on the fees charged.

Factoring is not for everyone.  First, the small business must be engaged in B2B commerce, not B2C.  Second, there are minimum billing requirements for the small business.  Most small businesses qualify, however, in today’s current economic climate, these minimums do tend to fluctuate.  Third, factoring is not cheap.  The small business does pay for the money factoring provides.  Most often, these charges are manageable as the interest only accrues for the 30 to 60 days it takes the client to pay the factoring company.  If your small business is in need of immediate cash infusions, factoring may be your best option.