Buyer Guide to Factoring
The ABCs of Business Factoring
Businesses need money in order to operate effectively; this has always been the case and will continue to be the case in the future. Sometimes businesses need short-term or even continual funding solutions that provide quick access to cash – your business is no different. Maybe you need some quick cash to meet payroll, purchase inventory or a quick boost to your company’s working capital so that you have extra money on hand. Regardless, businesses have a number of funding solutions available to them today - business lines of credit and small business loans being only two of the many.
One of these solutions is business factoring and is an underused yet highly advantageous method of receiving financing for your business.
What is business factoring?
Business factoring, also called “invoice factoring”, allows you to take your business’ unpaid invoices and receive cash for them from a factoring company or a “factor”. Factors take your accounts receivable, review them, and upon approval, advance you a certain percentage of the overall value of your submitted invoices.
Essentially, invoice factoring services provide a fast-funding option for large and small businesses who meet certain criteria. Much unlike business loans and lines of credit, your personal and business’ credit history do not come into play, rather qualifying for business factoring relies on your monthly invoices and the credit worthiness of those to whom you extend a limited line of credit through invoicing.
How factoring works - the process
The factoring process is simple and straightforward, at least on your end. You begin by compiling and making copies of the outstanding invoices that you want funded, though you should double check to be sure that all required information and signatures are in place before handing your invoices over to the business factoring service to avoid future delays.
Once the factor has possession of your invoices, they will perform certain checks on your clients to verify their payment history and their credit worthiness. Factoring companies use this information to determine whether they can accept your invoices, how much money you are eligible to receive up front, and even the discount rate that they will charge you for their factoring services.
After the factoring company checks out your clients, they look over each of the original invoices to check for errors, discrepancies, and missing information. Once the factor validates the invoices, they send out a notice of assignment to your clients, which this document informs your clients that their outstanding balances should be paid directly to the factor instead of to your business.
Getting your advance from the factor usually happens within two to five days following the validation of your clients’ invoices, though if a factoring company allows online invoicing, you may be able to receive your funding in as little as twenty-four hours. Generally, factors deposit funds directly into your business’ bank account, though some still rely on cutting paper checks to distribute advances to businesses.
When a factor sends you your initial payment, it is usually 70% to 90% of the value of your accounts receivable. Once the factoring company has collected from all of your clients, you will receive the remainder of your advance minus the factoring service’s fee, which generally runs from 3% to 5%, depending on a few different factors.