Getting started with factoring
A lot of businesses that are just getting started often struggle with cash flow in the beginning. This can be a precarious time for a new business startup. There are some financing solutions in place for this type of business need. It is called factoring.
The Factoring Process
There is a process that the business entity goes through to utilize invoice factoring. First of all the business has to choose one of the companies that provides factoring services. There are financial companies that are willing to give money to the businesses who have accounts receivables. There is a format that is used for this. Then the company goes about its business and generates its accounts receivable. This now becomes money owed to the company for services/products rendered.
The business decides on how much money they want to obtain in respect to the value of the accounts receivables. For example, a business may be owed $5,000 in their accounts receivables. They can take these accounts receivables to a service who will give them perhaps 80% of the value of the invoices. So, in this case, the business would receive $4,500 (80%) in cash for these accounts receivables. The factoring company will then collect the full value of these accounts receiveables that they have now taken charge of.
When the factoring company has collected the full amount of the accounts receivables they will pay the balance owed for them to the business. In this case it would be $500. However, there is a fee that has to be paid to the company for the services they have provided. Which is the advancement of the money and the process of collecting the receivables. The process is basically the same for all of the companies offering factoring accounts receiveables services. There will be differences in how much they advance, the criteria for qualifiying and the amount they will charge for their services.
Great Reasons for Factoring
It can be difficult and a concern for a business to use their accounts receivables for factoring. The business looks at this as money coming in and to have to lose any of it seems like they are eating into their profits. It does mean that they are not getting the full value of the accounts receivables because there is a fee to be paid for the factoring. But, the benefits of obtaining funds though factoring can far outweigh the costs.
When a company is in need of cash flow there is an urgency to this. Trying to get the needed money through traditional methods can be time-consuming. This often is not time that the company in need of money has. In most cases the required money can be obtained from the factoring of accounts receivable within a twenty-four hour period.
🤷♂️ Less Hassle
Trying to obtain money through short term loans can come with a lot of hassles. It can often mean the business in need of the money can’t qualify. This makes it difficult to find the money quickly.
💰 Less Cost
In many cases the fees paid for the factoring of accounts receiveables will be far less than what the interest would be on a short term loan that was taken out for the same amount. This can make a big difference in the overall profit margins.
👍 Breathing Room
Many times the money that is needed from the factoring of the accounts receivables is needed for payroll or for the purchase of materials so more product can be generated. By being able to utilize the funds owed from the accounts receivable it means that the company is not experiencing any downtime. If needed for payroll it means that production is not going to come to a halt because of a shortage of workers.