A factoring firm is a privately owned business-to-business financing company that provides its clients immediate cash in exchange for their unpaid invoices. The factoring company advances a certain percentage of that invoice to its clients and pays them the balance when their customers pay their invoices, minus a small fee for the factoring company’s services. A factoring company solves the problem of finding quick cash for your business. Factoring your accounts receivable is one of the most affordable ways to unlock money that is currently tied up on your debtors’ books.
Why has factoring become so popular?
Invoice factoring is an excellent alternative for many companies, including those who…
- Want to grow their business (work with larger customers, buy new equipment, etc.)
- Need money now for equipment loans, payroll, inventory, fuel, overhead, and other expenses
- Cannot wait for customers to pay them in 30, 60, or even 90 days
- May not be eligible for traditional loans and do not want to incur debt
Many businesses, new and old, choose factoring because it helps them maintain a steady cash flow. Factoring clients do not qualify based on their credit history, collateral, or years in business. Instead the factoring firm’s professional underwriters look at the creditworthiness of the factoring applicant’s customers and their ability to pay their invoices in a timely manner. Factoring companies are particularly popular during a difficult economy, when banks and other traditional funding sources are unwilling to extend credit.
Here is a basic example of how factoring companies work:
Business A is a small business working with many clients, including a large corporation we’ll call Client X. Client X has a strong credit history and is a long-time customer for Business A. Client X pays their invoices in 30 days, but Business A needs the money sooner. This is when Business A decides to factor their invoices.
- Business A sends their invoice for what Client X owes them to the factoring company.
- The factoring company promptly advances Business A between 75% and 100% of the invoice amount and handles the collections process.
- Within 30 days, Client X pays the invoice in full to the factoring company.
- The factoring company settles the transaction by paying the remainder of the invoice, minus a small factoring fee, to Business A.
Factoring invoices is a risk-free, debt-free way to get the money that is due to you on time, every time.
For more information about factoring, get an instant factoring rate quote today.
Below is a chart that looks at a small sample of factoring companies.