A factoring company can facilitate many needs pertaining to a business’s biggest challenge: cash flow. If this is a challenge for your business, then you might want to consider this as a viable option to alleviate this challenge. But what does a factoring company actually do? Most importantly though, how can it help your business? Within this article, we’ll break down the details regarding factoring companies to see if it’s a great fit for your business.
There can be a substantial risk when completing a service and invoicing the customer. The risk of defaulting on payment or delayed payment can stagnate a company’s bottom line. Factoring companies can help purchase invoice orders at a small discount and pay the business up-front. They also help alleviate the stress of making payroll.
Three Major Types of Factoring Services
There are three types of factoring companies: recourse, non-recourse, and spot factoring.
- Recourse is when the business owner assumes all liability if the invoices aren’t paid. This factoring type is the most common and affordable. Since the company agrees to be held liable for the risks involved within the transaction.
- Non-Recourse of course is when the factoring company assumes the liability encompassed in the assignment of the invoice to them. If the customer reneges on their obligation to pay the invoice, the business can’t be held liable for payment.
- Spot factoring is a type of factoring that accepts one or more invoices excluding a long-term agreement that the other two types entail. Also labeled single invoice financing, spot factoring is a convenient way to instantly monetize invoices for compensation.
Before a business makes a decision on a particular type of factoring, it should analyze certain factors. Evaluating their customer’s payment history and the number of their invoices are to be evaluated. For example, if the amount in question is considered small, the business owner may choose to absorb the risks themselves.
Factoring vs. Bank Loan
A factoring company provides some key benefits that you won’t get with traditional bank loans.
- A debt-free form of financing
- Unlimited Capital Allocation
- Approval times are quicker, usually within 1-3 Days
- Financing terms are determined upon the client’s creditworthiness
- Minimal paperwork involved
Traditional Bank Loan:
- Loan amount determined upon business’s credit history
- Longer approval period (even for a small loan)
- Capped funding (loan is limited to a certain amount)
- The principal and interest is repaid within a determined duration
the outline is here to facilitate your cash flow needs. Services like invoice factoring and Accounts Receivables have become the staple of our business services. There are several reasons why factoring might be a good consideration for your business. The main important reason is cash flow.
A form of financing that doesn’t put a strain on a company’s operations is invoice factoring. This is done by selling your accounts receivables to a factoring company for roughly 85% of its face value. To clear any confusion the term “accounts receivable financing” is synonymous with “factoring.”
Factoring allows companies to receive income from the client’s invoice prior to the invoice being satisfied. This gives companies the leverage needed to scale daily operations and take on bigger projects.
Factoring Isn’t A Loan
You are not borrowing money from a factoring company so coincidentally no interest is paid to the company. You are essentially selling your invoices for a discounted price to immediately receive the cash.
This flexible strategy of funding a business’s accounts receivables has fewer risks associated with the traditional model of procuring a loan. Since no equity is placed as collateral to secure the loan, it gives businesses the advantage of increased cash flow while keeping assets in the company’s possession.
One big reason factoring has become so popular these days is it applies to all businesses whether small or large. It’s even applicable to small startups too. Not requiring substantial financial requirements as traditional banks do is alluring to many small startup business owners. This is viewed as a financial catalyst for a lot of startup companies. With no financial history, many businesses struggle to obtain adequate financing to encompass their needs. By initially increasing a startup’s cash flow, small companies can get through the growing pains of establishing themselves in their specific markets.
The benefits of factoring outweigh its drawbacks by a longshot. Being able to be compensated at a quicker rate promotes exponential growth & sustainability. When utilized properly, it can solve many short-term problems many companies face with day-to-day operations.
Not being able to incur unnecessary debt or risk minimal assets can be a lifesaver to a company. The advantages vary from factoring company to company, so it’s best to choose one that’s trustworthy. Not all factoring companies are alike, so it’s best to do your due diligence to find one that’s tailored to your company’s needs.