With accounts receivable factoring, you sell the outstanding invoices of your business. You sell them to a factoring company and they will take on the responsibility of taking the debt and collecting from your clients. But of course, it comes with a fee.
Looking at how accounts receivable works, it can actually be a good deal. First is you don’t have to stress yourself collecting the payment since the factoring firm does it on your behalf. However, it is also important to note that there are different types of factoring receivables. In general, small businesses get to have cash advance or the funding that they need to fill in gaps in their cash flow.
When you sell your invoices, you get to have the cash advance. It is usually 80% of the invoice amount. Once they have collected the invoice, the 20% is paid to the borrower minus the factoring fee.
There are two types of factoring which include the following:
To get factoring financing, you need to be qualified by a factoring company or a factoring department of a bank. You will have to submit different documents and other requirements. First is that the factoring company will schedule a personal meeting to discuss your business needs, why you need factoring as well as the business’ support schedules and financial statements.
Accounts receivables are differently priced by factoring firms. This is what you call a factoring fee. It is a percentage of the receivables that are being factored. There are so many factors that affect the rate that factoring companies charge. Factoring firms assess the industry you are in along with the volume of the receivables. Next, the quality and credit rating of your customers are also evaluated. They also take into consideration the average days outstanding in receivables.
One of the reasons as to why many business firms do factoring is that it offers various advantages which include the following:
As with other financing options, it is not all advantages. There are also disadvantages that you have to consider.
Choosing a reputable and legitimate receivable factoring company is just one step for you to have a good overall experience. This is very important to avoid experiencing problems later on. How do you choose a factoring company? There are various things that you have to consider.
Business owners have the choice as to whether they should go for a traditional bank loan or factor invoices to increase working capital. Your choice depends on what your business needs and your credit score. If you need an instant cash advance, going for traditional loans may not be your best bet considering the documentation and lengthy process. In choosing to go for factoring receivables, you get to have the funds that you need.