Businesses facing a slowdown in cash flow due to tied up capital and slow-paying customers may consider using a factoring service to increase their liquidity during cash-poor times.
Factoring is the sale of accounts receivables to a factor company to generate cash immediately. Instead of waiting for your customers to pay your business the factor company purchases your receivables and assumes the responsibility of collecting your customer debts.
Here are some things to consider if you are looking to use factoring for your business:
One of the main reasons businesses choose factoring is the quick turn-around time for collecting invoices. Rather than waiting the usual 30 or 60 days for payment, after sending an invoice to a factoring company the business can receive its money within 24 to 48 hours.
The factoring company typically advances 70 to 90 per cent of the total invoice value up front after checking out the credit-worthiness of your customer. If your day-to-day operations are suffering due to large outstanding invoices, factoring can be beneficial.
Factoring can be costly, service fees may add up over time and end up being more expensive than lending. Traditional loans are generally less expensive than the price of factoring. However, depending on your business’ needs factoring may be worth it for immediate access to working capital.
Elimination of collections
Factoring simplifies the accounts receivable process since the factoring company handles collections your business does not need to worry about billing, credit checking or staffing those functions. Businesses looking to expand overseas may benefit from factoring as factoring companies already have experience in dealing with overseas suppliers and purchasers.