Factoring Services Available for Businesses
Whether you’re a startup business or established, you can run into the same problem: lack of capital to keep up with supply and demand. If you’re having difficulty securing adequate amounts of cash from a typical bank to keep your business operational, using a factoring service might be the answer to your problem.
What is factoring?
In simple terms, factoring is receiving a cash advance against outstanding invoices for supplies and services already delivered. The rates often charged range between 1.5% and 4.5% every 30 days predetermined by the amount of revenue they expect to take on. Most factoring companies offer a cash advance against the receivables from 70% up to 85%, and for low-risk industries such as transportation, even higher. The funds are generally available within 24 hours which is good news for cash-strapped businessmen. This allows business to stay afloat without increasing their debt.
Things to consider
Many small to mid-sized companies just don’t have the reserve capital to lay out large sums of money and wait for the customer to pay the invoice. What you need to decide is what type of service you are looking for. Do you want a factoring company to completely take over the role of collecting your receivables or just a portion, like the largest ones? Do you want your customers to pay you directly or go through the outside service? You also need to remember that you will pay a fee for the invoices farmed out and while the percentage is small, it can add up over time. Making these decisions and finding the best fit for your company will help you select the best factoring companies for you.
What factoring companies use as deciding factors for an approval
Though factoring is an easier and less invasive way to obtain capital for your business, there are still standard procedures that take place to determine whether it’s worth the investment. These companies will need to know your type of business, how long you are in business, the revenue you pull in yearly and the ability for your customers to pay within the allotted period, their creditworthiness. Since a factoring company is a lender and does not want their role to transfer into a collection agency, accounts on the books need to be current. If everything is in order and the company decides to move forward, they will ask to review any outstanding invoices submitted for accuracy.
Types of factoring companies
There are generally two ways that factoring companies work with a business, either using recourse factoring or nonrecourse factoring. The more common of the two, recourse factoring, is where the factoring company pays you for your invoices and then after the 30, 60 or 90 days you, the business owner, have to pay back the factoring company for any outstanding invoices that remain. The second type, nonrecourse factoring, the business owner is no longer responsible for the invoices once they are handed over. Any accounts that become delinquent, the factoring company assumes the full responsibility for the payments. This second option is much harder to acquire and mostly offered to long-term businesses with a low-risk product or services. There are many sub-parts to the two types of factoring services available. You should review all option and select the best one based on your business needs.
For businesses that don’t have the manpower to collect monies and need their capital to revolve to keep the business operating without failure, factoring companies offer an invaluable service. They provide business owner’s with a way to keep money available to expand and develop to their full potential.