Factoring is most often advertised as a way to receive instant cash on your company’s receivables. There are several other good reasons why companies decide to use factoring as a financial instrument.
Here are six key benefits that most factoring companies provide:
- Back office solutions. Collecting payment from customers can be taxing on your company’s time and overhead. A factoring company takes over that role with collections specialists who will follow up with your customers until they pay the full invoice amounts. Many factors also offer online accounts that allow you to track real-time customer payments. This frees up time for you to serve customers, seek out business opportunities, and not worry about getting paid.
- Instant cash flow. When you provide a service on credit, it is common to wait 30 to 90 days on customer payments. That can lead to cash flow problems. When you factor, you receive an advance on an invoice, often within a day. This quickly builds up cash flow, allowing you to add employees, buy equipment, and cover other expenses that help you meet demand.
- Better customers. Many factoring companies will have access to credit data and days-to-pay information on companies that may become your customers. Some factors even have their own rating systems for companies in your industry. This resource allows you to make informed, calculated decisions about new and existing customers.
- Faster growth. Factoring has the flexibility and capacity to help your company grow at a faster pace than if it were self-funded or backed by a loan. Factoring is also easy to set up. Instead of shopping for a traditional bank loan, you can open a factoring account within days. Unlike bank terms, there is no limit to the amount of funding from a factoring company with a strong capital structure. The factoring volume can increase from thousands of dollars to millions of dollars within months.
- Start-up funding. New companies often need financing to get up and running. But with no history, balance sheet or cash flow statement, they will not qualify for asset-based or cash-flow lending. Factoring does not have these requirements because it is based on the credit history of a company’s customers. A factoring company will examine your customer credit scores, payment patterns and overall financial health before agreeing to offer financing. How long your company has been in business is not typically a major concern to the factor.
- No debt. Factoring is not a loan. The financing comes through as your company accumulates invoices and is settled as soon as your customers pay in full. With recourse factoring, the factoring client does assume the collections risk if its customers default on payments. But most factors will allow you to “work off” that amount by withholding a portion of future cash advancements or reserve payments.