A factoring company purchases another company’s open receivables because the business needs an immediate sum of money. By working with a factoring company, the company selling its receivables does not have to wait to receive payment from its customers. The factoring company makes it possible for the company that is selling its receivables to be able to pay its bills, make payroll and purchase inventory for the business.
The Benefits of Factoring Companies
The benefits of factoring companies include the following:
• These are simple transactions.
• The company receives an immediate sum of money.
• The money received is based on the money that customers currently owe the company.
• The company does not have to take on any more debt.
Invoice factoring also goes by the name of “receivable factoring” and “accounts receivable financing.” The first thing that a company must do to obtain this type of financing is contact a factoring company to begin the process. When a customer makes a purchase, the business will create an invoice for the factoring company rather than the customer. The factoring company will purchase the invoice and place an advance on the invoice total into the company’s bank account within 24 hours. In most cases, this amount will be approximately 90 percent of the total. The customer will pay the factoring company, and the factoring company will pay what is left of the balance minus a fee to the original company.
The Difference between Invoice Factoring and a Traditional Bank
Many people resort to applying for a loan from a bank when they need money for their businesses, but this isn’t easy for everybody. These people do not always have the weeks that it usually takes to be approved for business loans and business lines of credit. Sometimes, it can even take months! In addition to that, taking out a business loan or a business line of credit adds to the company’s debts.
It can even be hard to qualify for a business loan or a business line of credit because banks check a company’s credit scores before they approve a business for a loan. If the company has a low credit score or doesn’t have any credit at all, the bank will deny the loan, and the business cannot purchase what it needs to make its business grow. Sometimes, the bank will grant the company a loan, but the company may not be able to receive as much money as it needs. This will also prevent a business from growing.
Invoice factoring can keep you from experiencing the unpleasant scenarios described above. It will only take about 15 minutes to approve you for an invoice factoring loan, and your approval will be based on your customers’ credit rather than your own credit or your company’s credit. You will be able to receive plenty of money to do whatever you need to do for your business because a factoring company can offer you between $50,000 and $200,000.
The Terms of the Contract
In order to start a relationship with a factoring company, you must first enter into a factoring agreement. You and the factoring company will determine the contract’s terms. You can have a term that only lasts three months if you like, but if you need a longer term, you can choose six months. Some people have even been able to obtain a term of several years. It’s also possible to negotiate a month-to-month contract. Before you sign it, make sure that you take the time to read it thoroughly.
A factoring company will want you to commit to a set number of invoices. By doing so, you can receive the lowest interest rates and the maximum amount of advances. You may be able to receive 70 percent of the invoice amount. Sometimes, you can even obtain 100 percent, but this will be based on the creditworthiness of your customers, your volume and your pay trends.
As can be expected, you will be charged fees for this service, but they will depend on your number of invoices, customer pay trends and the industry that you are in currently. Some factoring companies will charge a flat fee, but others will charge a fee along with fees for administrative and support services. Don’t sign the contract until you know exactly which fees you are paying and the cost.
The right factoring company for you is the one that can offer you the sum of money that you need to meet your obligations. It should also have other services that will benefit your business. You may wish to do business with a factoring generalist that provides factoring services to people in all types of industries. A factoring specialist will only provide financing services for people in the same industry.