Business factoring is a way to maintain cash flow, expand the business, or acquire equipment without constraining capital or taking out business loans. Utilizing all available capital leaves the business vulnerable. There will be no money to cover emergencies, sustain an expanded business, or take advantages of immediate opportunities. A loan requires a business credit check and will have added costs, such as an interest rate.
How Factoring Works
There are several types of factoring, but the concept is the same for all of them. A private lender, typically a factoring company, buys business invoices at a lower amount than the face value. The business gets the cash quickly instead of waiting for customers to pay the invoice in full, which can take up to three months or longer. That can make a substantial difference in the amount of money the business has at any given time.
Once the customers pay the balances in full, the lenders takes a percentage of the total amount of the face value as their fee. If any money remains, the lender forwards it to the business. The business has no upfront costs to participate in factoring.
The amount the business gets for the invoices depends on the credit rating of their customers and the number of invoices factored. Another consideration is whether the transaction is a one-time arrangement or an ongoing process. The rate can be anywhere from eighty to ninety-six percent of the face value. The fee percentage can range from one to four percent of the total amount.
It is important to compare factoring companies prior to working with one. Percentages, minimum requirements, and conditions will differ from company to company. Some companies, for example, require an invoice amount of five-thousand dollars per month. Business owners can click here for more details on percentage rates.
Others will provide both regular factoring and spot factoring. That means the lender buys one large invoice. This works well for industries that operate on large contracts or multiple projects at once. A construction company that is building a new office building can sell that invoice and use the money to get supplies or rent any special equipment needed.