Factoring For Your Business: What Is It And How Does It Work?

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Two of the biggest issues facing all business owners are managing the company’s cash flow and getting paid from customers. Many businesses issue invoices that have aging periods that can range from 30 to 90 days. Waiting for customers to pay those invoices can cause a strain on cash flow, which is felt in all departments from payroll to being able to fill any additional orders that come through the door. In order to remedy this situation, many business owners turn to factoring.

What is factoring?

Factoring is a form of short-term financing in which a business sells its unpaid invoices to a factoring company in exchange for cash equal to the amount (minus a small fee) of the total volume of the invoices submitted. Factoring agreements can be arranged in 48 hours, and business owners can usually expect to see money with 24 hours after invoices are submitted. This money can improve cash flow and alleviate financial strains that a business may be experiencing.

No credit checks

Unlike conventional loans, approval for factoring is not dependent upon your company’s credit rating. Factoring companies make their money from processing fees, which go toward assuming the responsibility of getting payments from your customers. In essence, a business is not only getting immediate working capital, but they are also selling the headache of tracking down payments on unpaid invoices.

Zero debt on balance

Using conventional bank loans for short-term working capital involves taking on debt, which registers as a big red mark on the balance sheet. Because factoring is, at its heart, a sale – submitting invoices in exchange for cash does not show up as debt of any kind. This means that the company’s credit rating and balance sheet both are not impacted by factoring, which means there are no hindrances in seeking additional financing from another source in the future.

No Restrictions on working capital

Most conventional loans have built in terms that stipulate how money is to be used. Some restrict usage to equipment, staffing, inventory, etc. – which can be very prohibitive. The capital received from factoring can be used for any purpose, because each invoice submitted is considered a sale. That money can be used for company growth, project completion, or it can just be put in the bank.

Both new businesses and large operations take advantage of factoring in order to prevent any slow downs in cash flow. As soon as a sale is made and an invoice is generated, it is submitted to the factoring company for instant working capital, which can be used for growth to take on more and larger customer orders. Many successful businesses have built long-term relationships with factoring companies because of the quick turnaround time, and because factoring ensures payment without resorting to taking out conventional bank loans.

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