What is Factoring and How Can It Help Your Business?
Businesses of all sizes will need access to capital to complete projects and grow. Alternative financing processes, like factoring, can help give your company the cash you need without having to wait for a bank loan to be approved. This finance method is not a loan and does not impact your credit, giving you more flexibility without having more bills.
Factoring is the process of selling your accounts receivable to a third party for a small fee. This fee is taken out of the value of the invoices and the rest is put into your account within a few days instead of the one to three months that your clients have to pay for the products or services you have sold them.
A good example of how this process works is in the vehicle repair industry. For many automobile repair jobs, you will give your clients between 30-90 days to pay the balance on the invoice. This helps your customers afford the repairs while still paying what they owe. By selling your accounts receivable for these repairs, you will be paid within a week and your customer still has the term of the invoice to pay.
Factoring your invoices can help you get the cash you need to take on large projects sooner than your clients can pay. This means that you can buy the supplies you need for your next job sooner and keep your reputation for getting it done intact. It also means that you are better able to take advantage of time-sensitive deals to grow your business and don’t have to collect on invoices yourself.
Since this process does not check your credit, or impact it, this can be a good way to get caught up on some of the missed payments that you have or otherwise build your business credit. You can even find accounts receivable companies which offer you a variety of plans including one-time, quarterly or longer contracts so you can meet your cash needs without committing to more than you need.
Factoring is the process of selling your accounts receivable to a company who will take over the collection process, give you cash now and charge a very small fee. Since this is not a loan, you will not have another bill to pay and it will not impact your credit. Another benefit is that you can usually get the funds you need through your accounts receivable more quickly than through other financing methods.