You may have heard the term factoring finance and wondered how it relates to the business world. This article shares a brief overview along with some FAQs to familiarize you with factoring finance and help you decide if you can benefit.
1. What Is Factoring Finance?
Factoring is a financial solution where a business sells its invoices to a third-party finance company. This third party is the factor. The factor will now be responsible for collecting the payments from your customers for you. Sometimes you may hear factoring referred to as accounts receivable financing.
2. Why Should a Company Factor?
Many companies choose this financing solution for the sole purpose of getting the money owed to them faster. If you wait to collect your payments the traditional way, you are waiting for a customer to pay at the end of the month or in a 30-day cycle. However, if the customer is late with their payment, or doesn’t pay, you have nothing to show for it. Factoring can be a quick way to build your cash flow.
3. Are There Other Benefits?
Yes, there are some other benefits, which include:
- Factoring is determined by the customer’s credit, not your credit history.
- This is not a loan, so there is no incurring debt.
- Factoring agents will customize with you so you can make this a truly personal and adaptable process.
- Factors offer support with managing collections, so you have more time to put your efforts into the growth of your company.
- Factoring is an alternative to a bank loan if that is not a feasible option for you.
- Factoring has a long and successful history and has evolved allowing companies to increase their cash flow while focusing on growing their companies.
- Factoring usually has a quick approval process. Bank loans may take months for approval whereas invoice factoring can take just days to get started.
4. What Kind of Companies Factor?
Many companies can benefit from factoring. Regardless of the size or stage of your business, factoring is an option. It does not matter if your company has one employee or is a Fortune 500, factoring can help. The stage of your business also does not matter; it’s an option whether you are just starting out or have been in business for years.
Business credit is also not a determinant, so even a company with a less than stellar credit history can work with a factoring company to increase their cash flow. This, in turn, can improve your credit score. Remember, the factor approval is dependent on your customers’ credit strength and history, not your own.
5. Is Factoring for You?
If for whatever reason, a bank loan is not for you, you may be a great candidate for factoring. Factoring can provide quick cash flow so you can keep your company moving along. Whether you have a newly established business, are looking to increase your credit score, or simply need cash quicker than waiting for customers to pay, think about factoring.