Businesses can have either a love or a hate relationship with factoring. The ones that hate it often do not understand how it works at all. The ones that love it have experienced the benefits that factoring can bring. If you don't have much knowledge of factoring, there are many things that you will learn to love about it.
Provides quick access to cash
Have you ever been in a position where you are wondering how you are going to meet payroll or pay your electric bill? That is common for smaller businesses and start-ups. It can even plague larger businesses in difficult economic times.
Accounts receivable funding, or factoring, offers you a way to get access to the cash you need quickly. The application process can take three to five days to complete. Once you are approved with a factoring agency, you can get access to cash within 24 to 48 hours of submitting the invoices. You can use that cash to pay your employees, pay the light bill, or for any other need you might have.
Available to companies that don't qualify for traditional financing
Banks and other traditional lenders don't extend loans to businesses without a solid credit rating and proven means of paying the money back. For smaller businesses and start-ups, those traditional means of financing are often closed off. It can make it difficult for many companies to grow.
Factoring is not based on your company's credit rating or whether you have five years of positive business growth. It is based on the creditworthiness of your customers and how much cash you have trapped in invoices. This offers many businesses a viable financing method that does not involve exorbitant fees or percentages. The typical factoring fee is between 3 and 8 percent, which is much less than the 25 to 50 percent of merchant cash advances.
Offer better credit terms to your customers
If you know that you can access the cash trapped in your unpaid invoices, you can afford to extend your customers a few more days to pay. This can encourage these customers to extend more business to your company, which can help you grow at the same time. It can also attract new customers who prefer generous credit terms to cash only businesses.
Factoring agencies will only extend cash advances against invoices from creditworthy customers. They will thoroughly check those customers' credit history before approving their invoices for factoring. This offers you the added protection of dealing with more creditworthy customers, which also improves your cash flows.
Gives you the chance to stabilize and grow your company
When you have ready access to cash, it will improve the overall operation of your company. You can start paying your company's debts on time. This helps improve the business credit rating. This, in turn, can get your company better credit terms and higher credit lines.
By freeing up the cash you have trapped in open invoices, you can grow your company in many new ways. You can take on that big client or project that you could not afford before. You can buy that new product line to expand your business. You can open up a second or third location. Your company will have new opportunities and options that were not available before.
These are just four reasons why you will love factoring, once you get to know how it works. It is a viable financial alternative for businesses that cannot or do not want to qualify for a traditional bank loan. It gives you the chance to grow and stabilize your business. What else you do you need to know about factoring to fall in love with it?