Factoring for Your Business: Everything You Need to Know
As a business owner, you’ve probably realized the need for additional funding to see you through lean times or cash flow gaps now or in the future. A form of alternative financing that is becoming increasingly popular with small businesses is factoring, also known as accounts receivable financing. Here is some information on this method of obtaining needed capital to help you determine whether it’s right for your company.
Factoring Basics
Factoring is a method of converting unpaid invoices into immediate cash for companies with late-paying clients or seasonal lags in sales. A factoring company purchases your accounts receivables, provides an advance, and assumes collection responsibilities for the unpaid debts.
How Factoring Works
After your application for accounts receivable financing is accepted, you send the approved invoices to the factoring company and receive an advance of about 75 to 80 percent of their value. You can use these funds to help grow your business in any way you see fit. For instance, you can use the money for general working capital during a cash flow crisis. You can take advantage of opportunities to expand your business by hiring new employees or branching out into new locations. Some companies have urgent needs to build a website or develop more sophisticated marketing techniques. Others use funds acquired through factoring to purchase supplies, equipment, or inventory. Once your clients pay their bills, the factoring company sends you the balance of the invoice amount after subtracting its fee.
Benefits of Factoring
Factoring appeals to companies that have not yet built up a strong business credit rating, because approval depends upon the quality of their clients’ credit rather than the company’s credit. Even if you qualify for traditional bank loans or lines of credit, the process of approval is slow and arduous, whereas you can obtain the funds you need through factoring in as little as a few days. Factoring allows you to retain full equity in your business. It also protects your assets, as no collateral is involved. Rather than spending your time attempting to obtain payments from customers, you can focus on business growth, as the factoring company takes over the collection of unpaid invoices.
For more advice on factoring, contact Prime Start Capital.
