If your business needs extra funds or has struggled with cash flow problems, you may have considered getting a loan. However, invoice factoring is a unique service that is different from the common lending platforms.
What Is A Factoring Company And What Does It Do
What Is A Factoring Company And What Does It DoIt alleviates the need for high-interest loans by improving your finances? Here’s everything you need to know about factoring companies.
Why Would a Business Work With a Factoring Company?
You may be wondering what is a factoring company and what does it do? It’s a company specializing in invoice factoring to improve business cash flow or purchase outstanding invoices from slow-paying customers.
This lets businesses get cash flow immediately and continue expanding. Rather than waiting 30-90 days to get paid, the factoring company will send money right away.
Factoring companies focus on specific industries where money is needed fast. Furthermore, banks can offer this service, but most factoring brands are independent providers.
Why Would a Business Work With a Factoring Company?
Working with a factoring company provides businesses with cash within 24-hours, which lets them trade and pay bills on time. It’s a great solution for unsteady cash flow or slow payments. It’s also easier to get money this way than going to a bank to get a traditional loan. Also, the fees are low, and there aren’t any long-term contracts.
How Does Factoring Work?
Factoring transactions are straightforward to implement into a business. They receive the payment you’d get from a client, and you get money instantly from the factoring company.
The first payment is called the advance and is funded when the factor purchases the invoices. The advanced payment covers 80% to 90% of the invoice. The initial payment percentage is based on the risk profile of the transaction.
The remaining 10% to 20% has a smaller fee and is only paid when the client pays the invoice entirely.
Some industries like trucking, landscaping, and staffing often get higher than average advances. Their advancements can range from 92% to 98% since they are more consistent in receiving payments.
The Costs of Factoring Invoices
The rate of factoring is determined by the financing volume and credit card score of your business. Generally, the fees range anywhere between 1.15% to 3.5% per month, making it a much better alternative to banks.
The fee structure is easily customizable so that a business can run smoothly. Most companies will call for a flat fee or pro-rated model. Here’s an average fee structure most companies will get:
- 1% per 10 days
- 5% per 10 days
- 2% per 45 days
The fee percentage will vary depending on the amount of business a company gets. The more payments required and bigger cash flow means a smaller percentage amount.
This is because a factoring company will want your business since the tiny percentage will still lead to huge profits.
Recourse vs Non-recourse
There are usually two types of factoring payment plans: recourse and non-recourse. In a recourse plan, your company is responsible for payments going through. If clients don’t send money, you are liable for the missing income.
After 90-days, the factoring company can present the unpaid invoices to you for reimbursement.
However, in a non-recourse plan, you don’t need to worry about if the client doesn’t pay. If the client can’t pay due to bankruptcy, you won’t need to repay the invoice to the factoring company.
However, the bankruptcy needs to happen in the first 90-days. After 90 days, bankruptcies are not covered, which is an important detail overlooked by clients.
Also, the non-recourse plan does not protect against late payments, and you’ll still be reimbursed after the 90-days.
Non-recourse tends to be more expensive and restrictive compared to a recourse plan.
Advantages of Working with a Factoring Company
The number one benefit is that your cash flow improves immediately, and your money is not delayed. Therefore, you can expand quickly and grow the business. Moreover, factoring users can also get other benefits like:
- Help with business credit decisions
- Support handling payments
- Flexibility with money
- Easy qualification requirements
How to Select a Factoring Brand
Selecting the right company to work with can improve the success of your business. Therefore, working with the perfect factoring company can lead to better business propositions.
They can offer other services to help the success of your brand. Moreover, make sure that they specialize in your industry since they will have experience in helping you grow.
Final Thoughts
Working with a factoring company can help a business expand thanks to the faster cash flow. The fees are much smaller than banks, which makes it an excellent alternative.
Factoring companies work with various industries, and getting qualifications to receive payments is an easy process. Also, they can help with business payments and credit decisions.
_________________________________________________________________________
Some other articles you might find of interest:
Understand how you can maximize your time to grow your business:
Time Is Money And Your Most Valuable Resource. Use it Wisely to Build Your Business
https://www.thekickassentrepreneur.com/time-is-money/
Looking for effective ways to drive and increase traffic to your startup website?
SEO Traffic Guide To Boost Your Blog Rankings
https://www.thekickassentrepreneur.com/guide-to-boost-your-blog-rankings/
Looking for effective ways to drive and increase traffic to your startup website?
3 Top Reasons Why Startups Fail and How Not to Become a Victim
