A business will not realize profit without access to the funds it requires to offset operational expenses and grow. Although it may get high revenue, there may be slow-paying clients hence financial shortages. To avoid such a situation, you can resolve to obtain cash from alternative money lenders. Factoring increases your cash flow and offers an efficient system for collecting receivables from clients. This post will offer details on what you need to know about this financing option.
The Process of Factoring
Factoring is different from loans and occurs when you sell some or all of the accounts receivable and invoices to a factor (service provider). The factor will offer cash for a value percentage of every invoice. The factor then collects the payment from the client and deducts the interest payment and fees before returning the balance to your business. Although the factor has to wait to collect payments, the profits from fees charged protects them the risk of client nonpayment.
How It Works
After the application and approval from the factoring company, you will be advanced about 70-95% of your invoices’ value. Some factors may offer funding on the same day if you complete your underwriting and application before noon. Your client will then get the ‘arrangement notice,’ which directs him/her to pay his/her outstanding invoice when due to the factor. After your clients clear their payments, you get the remaining amount less the factor’s charge. You could apply online or request a phone discussion with the factor to get answers to your questions.
To qualify for services of a factor, the firm will examine the customers’ creditworthiness since they will be making payments to the invoice. The factor will also ascertain your average monthly returns in the past three months. The average minimum monthly revenue depends on the factor that you settle for. Moreover, even businesses that have been in operation for a few months can still acquire deals from factors.
There are two types of factoring; recourse and non-recourse factoring. Recourse factors will hold you responsible for unpaid invoices or accounts receivables even after you have spent the advance funds. The non-recourse factors protect you from liabilities such as customer insolvency or bankruptcy. The fees from non-recourse factors are usually higher since the factor is liable to all risks of uncollected invoices.
Cash-flow is the heartbeat of every business. Missing liquidity will leave your business stuck and in a rut. The most compelling option to keep your venture afloat is contacting a factor. This option of financing will reduce your financial burden and invoice processing.