We’ve seen basic motivations for using Factoring. It’s simple and easy due to your company leveraging your invoices - turning Accounts Receivable into Working Capital in a week or less, rather then waiting 30-60 or 90 days. Would it be worth taking a 2%-5% discount off your Invoices if that meant not having to wait for your Customers to pay their invoice? Its not uncommon for a Company to discount 5% of the total invoice if their Customer paid Cash On Demand.
What if the 30,60, 90 day wait was scaled down to 2-7 days with fairly little effort on your part? And going forward, 2-3 days for every instance you opt to sell your Invoices? This is where your Funding Company is of service to you. Make your invoices COD minus a small discount!
How it works?
You Invoice another Company, or Invoice a Government office; Federal, State, County, City, Borough. You put in a request to your Funding Company to legally purchase this payment(s) from you. Your Funding Company evaluates your Customer’s payment records. Then advances you 75% - 90% Working Capital of your total invoices, depending on how your Invoiced customer pays and how many Invoices you are selling. Its also possible to have a recourse and non recourse agreement. The Funding Company does “soft” collections just for your Invoiced customer to remember where to submit the payment. Your Funding Company will pay special care to making this arrangement clear to both you and your Invoiced customer. It's part of the philosphy to make your business run easier. As your Invoiced customer submits their payment, then the Factor will submit the balance of the 100%, to you, less the discount as agreed.
Who is it ideal for?
The new business, the business experiencing growth, the business that cant obtain funds through traditional banking or finance companies, businesses in need operational capital, a business going through restructuring.
What is the cost?
The first month can range from 4-5%. Of course, some Funding Companies advertise being able to do 1.5% to 3%. Just be careful with that. Ask the cost of the application fee. Ask if that’s for an entire 30days or on 15-20 days and how many Invoices are bought? And are there loopholes that allow your Funding Company to increase the percentage.
* just a brief FYI. Factoring is unregulated. We dont make that point to scare you away as this form of Financing has been a viable method for centuries. Just be cautious of tempting offers that come with a lot of bad surprises; no return phone calls, late in delivery, disorganization. Idealy, your Factor should be an asset, a figurative partner in your work - maintain your best interests. So long as you stick with a Funder with a solid reputation, then your Business will see tangible pressures taken off your shoulders.
Any other benefits to highlight?
Ask yourself this question: How would it be if you could just concentrate on your day to day operation? Factoring allows you, the Business owner or the Manager, to focus on your business. Here, you are relieved of the normal stresses that exist when Working Capital for salaries, supplies and administration is running low. Your Factor can even give you a credit analysis of your Invoiced customers. And if the thought of a Bank Loan weighs heavily on your shoulders, then this is a perfectly viable alternative. Financing via cashing in your Invoices removes the burdens off your shoulders - it adds to the Working Capital without increasing your overhead.
About Dot Com has a quick article on AR Financing