If you are looking for a quick way to raise cash for your business, factoring is definitely one of the fastest options available. The initial setup can take as little as three days from the time you submit your application. The process of submitting invoices for factoring and getting the cash from them can take as little as 24 to 48 hours. Why is accounts receivable funding set-up so fast?
Factoring is Definitely Different From Banks
Have you ever tried to get a bank loan? It can take weeks or even months to get a decision from a bank lender. They consider how much money your business is making, what kind of assets they can put a lien against, the future of your cash flows, and every other piece of minutiae that they can think of. And then, even if you have the best credit and customers in the world, they may reject you for a technicality.
Factoring is definitely different. This form of financing looks at two things: the creditworthiness of your clients and how much your open invoices are worth.
When you submit an application to a factoring company, you also submit a list of the customers you have extended credit to. The factoring company is going to do a credit check on those customers. They are going to find out if those customers have a good record of paying their bills on time.
The company is going to also look at how much your open invoices are worth. Open invoices are any invoices that have not been paid yet. Hopefully, most are less than 30 days old. Those are the ones that the factor are interested in. Once an invoice gets older than 60 days, it is beyond the factor's interest.
The process of checking your customers' credit and the value of your open invoices will take a few days. However, in the vast majority of cases, this process takes 5 business days or less. Compare that to the several weeks or months a bank would take to give you a decision.
Notifying Your Customers
After receiving approval from the factor, the next step is notifying your customers. Factoring involves legally assigning your open invoices to the factor. And your customers must consent to this before it can happen.
This is often the slowest part of the set-up process. The factor will send out a notification to each client of the situation. Then, the client must respond with an affirmation that they agree open invoices can be assigned to the factor.
One of the best ways to speed this process up is to notify the customers of this even before the factor sends out their notification. A letter or phone call with a detailed explanation of what you are doing and why you are doing it can make this process go faster for everyone.
Once enough of the clients have consented to the change, you can begin factoring invoices.
The Process of Factoring is Even Faster
The actual factoring of invoices is far faster that the quick application process. When you have a set of invoices you want to assign to the factor in exchange for cash, you just send them to the factor for review.
The factor is going to review each invoice and verify they are legitimate charges. This may involve a phone call or email to the customer, in some cases. They will also occasionally recheck the credit of a customer just to make sure that business remains creditworthy.
Once all the checks are done, the factor will release approximately 70 to 90% of the invoices' value to your business. All of this can happen in 48 hours or less, in many cases.
Your business needs the cash it requires when it needs it, not at the bank's whim. That is why you need to consider factoring your company's invoices. It can improve your cash flow and let you make strategic moves without worry about where the money is coming from.