Factoring is when a company sells its account receivables, or invoices, to another company, and that second company provides cash to the first company. This is helpful when the first company needs cash to cover something like payroll but their invoices have not been paid yet. This may be for various reasons, including that the invoices are not due for 60 days yet the payroll needs to be paid in one week.
There are many companies that using factoring, or accounts receivable financing, to fulfill daily or weekly cash obligations. There are a number of perks to using them and can help businesses grow. This includes a wide range of businesses, from large staffing companies to smaller seasonal companies like water parks or ski resorts.
1. You can receive cash quickly
Some companies have invoices for their customers that are not due immediately, which means that they are not paid for some time. The companies still need money for day-to-day operations, which is when accounts receivable financing can help. Most factoring companies can provide funding in just one day for companies that they have worked with in the past. The quick turnaround can be beneficial. This funding can be up to 90% of the value of the invoices, which may be significant.
2. You do not have to deal with invoice management
The factoring companies, because they receive the unpaid invoices, also process the invoices when they are paid by the customers. The invoices may be greater in value than the cash you received, so any leftover cash will be sent to you, minus the agreed upon interest charges or fees. This is also ideal so that you do not have to spend as much time managing invoices. You can focus your time and energy on other parts of the business that can help it thrive.
3. You do not have to be an established business
If you are a startup company and do not have an established credit history, it can be difficult to acquire traditional loans through a bank. If this is the case you can still using accounts receivable financing, which is a more flexible option. Even if you are an established business, you may still prefer to take this route because of the other perks, like receiving cash quickly. If you have taken out lines of credit, and are unable to increase your credit line, you can use factoring businesses as well.