What is Factoring and Why Do Businesses Use This as a Financing Option

Having a good cash flow is very important for any business to run smoothly. When there are expenses, not to mention accounts receivables that may take time, sometimes it can be a big challenge for a business to search for the funds it needs to fund its growth and continue business operations. This explains why there are many business owners relying on factor. For many who have not yet tried this method, just what is factoring?

What is Factoring
What is Factoring

Know More About Factoring

Factoring is a kind of financing that enables companies who are experiencing some problems in their cash flow to be able to get additional capital. If you happen to have clients who take 30 to 60 days before they pay up, this may create gaps in your cash flow, especially since you won’t stop acquiring new clients and providing products or services.

To fill in the gap, businesses turn to invoice factoring. Over the years, this type of financing method has become a widely popular choice among business owners. But if you are not so familiar as to how it works. This articles gives you a simplified explanation of the process and how you can get one.

How Does It Work?

Instead of applying for a traditional loan where you have to prove to the lender that you have good credit standing, invoice factoring works differently. You work with a factoring company that will buy your invoices. Once you decide to factor your invoices, it means that you are selling your invoices in lieu of the quick cash that the factoring company will give to you.
Factors will get your invoices and they will pay you installments. The first one is you get to have the cash advance. Once your client pays the amount stipulated in the invoice, the factor will give you the remaining amount deducting their fees.

Recourse and Non-Recourse Factoring

Factoring companies offer different kinds of factoring. These are recourse and non-recourse factoring. With recourse factoring, the factoring company takes responsibility as payment for the invoice. With non-recourse factoring, companies sell invoices to the factor and the factoring company will then assume the credit risks in these invoices. Depending on the company, there are factoring companies that actually offer both non-recourse and recourse factoring.

Fees and Contract Terms

There are various fee structures. The overall fee will depend on different factors which include the volume of your receivables, creditworthiness of your customers, etc. There are factoring companies that may have additional fees for money transferring, collateral, and shipping among many others.

How to Qualify

Compared to other option, it is relatively easier for you to qualify for factoring. There are just two main requirements required for your invoices. First is that the invoices must be due from reputable and established commercial businesses or government clients. Another requirement is that there should be no encumbrances. Your company should also be in clean slate which means that it does not have any legal issues.

What Are the Benefits of Factoring?

One of the main reasons why business firms factor is they want to boost their cash flow. Are you considering this option? Here are some of the benefits of factoring:

  • Factoring allows you to get the funds that you need without having to hassle yourself with the strict documentation usually required by the banks.
  • The release of funds is quite fast. It just takes days.
  • Factoring companies give back-office support. In fact, depending on the type of factoring and the services offered by the factor, they may also provide managing collection services for your clients. This allows you to have time to focus on other aspects of your business.
  • Factoring is flexible in the sense that you can customize it in such a way that it will give you the capital that you need.
  • Contrary to what most people think, factoring is really not a loan. When you factor business,you don’t incur any debt. Your factor will just deduct the fees.
  • Another benefit is that it is scalable. It can grow if your receivables grow.

Should You Factor Your Invoices?

Given the numerous benefits of factoring, there is no reason why you should not. However, it still depends on what your business really needs. At the end of the day, it always helps that you are familiar with your options so you can easily compare and identify which financing option is the most suitable to your funding requirements. Once you have decided that you want to factor your business, the next step is for you to find a reputable factoring company that you can work with.

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