What to do if you are short on cash for business and can’t get a loan? If you searching for a quick short term financing solution for your small business capital needs, a factoring is a viable financing option.
Factoring involves selling of business invoices to a third party called factor. Invoices are usually sold for a certain percentage of their total value. It means you will get payment immediately for the goods or services sold to your customers. On your behalf, factor collects payments from customers and forwards the remaining balance to you by deducting the service fee.
Factoring is a smart financing option as it gets your business quick cash for capital needs irrespective of the business size or performance. On top of that, if you have an sufficient invoices from reliable accounts you can factor more than you can borrow through a lender.
How Factoring Works?
The process of factoring is simple. After you hand over your accounts receivable to the factor, the factoring service pays 75-90 percent of the total invoice value to you within 3-5 days of receipt.
Every factor before accepting the accounts receivable, evaluate the integrity and creditworthiness of your receivables. As the factor doesn’t work as a collection agency, is needs assurance that accounts have good standing. After accepting the invoices, factoring services examine them for precision. If all the invoices are properly issues, the factor asks your customers to pay the invoices by sending them a notice of assignment. This instructs your customers to make all future payments directly to the factor.
Today, almost all factoring services offer real time access to your accounts so you can track your revenue and expenses and the process of sending notice of assignment to final payment.
Advantages Of Factoring
The benefits of using a factoring service are as follows:
- It offers quick access to cash for your business capital needs like launch a new project or for growth initiative.
- There is no collateral requirement in factoring services. Their due diligence is the basis for all general factoring agreements.
- With the help of a factoring service, you save the time of invoices collection, managing and reconciling of invoices. The factoring service assumes the complete process of collecting your invoices by cutting down on invoice collection wait time.
- In case of a business loan funding, its you who have to convince a lender to secure funding. This can be hard-hitting process especially for startups. But with factoring, it’s about your customers and not about you.
How To Select The Best Factoring Service
There are many factoring services that are specialized in different business niche, or annual revenue. You can qualify for many but not all offer the quality service and cost effectiveness. Before selecting the best factoring service, you should compare different services online and look for online reviews or references provided. You can also discuss your requirements with a factoring service representative to select the best suited company for you.