Factoring, also known as accounts receivable financing, is becoming a popular way to help businesses improve their cash flow. It’s not for every business, but it can certainly make a difference when you have outstanding invoices that aren’t paid and need capital.
How Factoring Works
Factoring isn’t like a debt. Your business actually sells an asset, the invoice, to a lender. The lender then gives your business 70 to 80 percent of the invoice immediately. When the customer pays the invoice, the lender takes their fees and if there is any leftover, it comes to your business. Because the lender isn’t looking at your business’ credit history, it can be a really good thing for new businesses.
However, factoring is controversial because it can cost several points over traditional lending. Every business has to look closely at the terms and conditions of the factoring and how it could work in their business model. Factoring is more economical with larger invoices.
Lenders who offer financing assume the burden of collecting invoices and assessing risk, which can help small businesses. Your business can get money in 24 to 48 hours, depending on the lender. If your business is facing a payroll shortage, factoring could be a good stop-gap measure.
Many Companies Factor Their Invoices
It used to be that factoring was just for the garment industry. Financially vulnerable companies would factor invoices because they weren’t credit-worthy enough to use a bank. Today, the industry is much different. Trucking, health care providers and construction companies often use factoring to meet cash flow needs. It’s estimated that billions of dollars flow through lenders in accounts receivable financing each year.
Get your questions about factoring answered from the financial specialists at 5 Star Funding Group. Learn how it could fit into your business and help with your cash flow problems.
