Among all the various potential sources of funding, factoring for small companies often prove to be the best option available. Traditional bank loans have become impractical and even impossible these days. Even if you are eligible, the entire loan application procedure can very tedious and time-consuming.
So how does factoring work? Here’s the gist of what you can expect:
- A simpler and faster application process. It doesn’t take all that long to know if you can get the financing you need. That’s because in factoring, your credit doesn’t matter. What’s more important is the credit-worthiness of your customers. That also means the requirements for getting the financing you need are far less stringent.
- Your accounts receivable will be assessed to determine if they are eligible. The factor determines whether the customer will actually pay the amount they owe you, on time. If your customers are huge companies, then they’re more likely to be approved than individuals or less well-known or new companies.
- The factor then advances you a percentage of the value of the receivable. For example, if the amount of the invoice is $100,000 then the factor can advance as much as 85% of the value, or $85,000. Once the customer pays the entire amount, the factor forwards to you the rest of the 15%, less the fees charged by the factor.
- The fees can vary depending on the factor. Some factors can charge as much as 3.5% of the value of the account receivable, while others may charge 2% or less. Other fixed fees may be applied as well.
- The factor collects the payments for you. They’re the ones who contact the customers, and this frees you from setting up a collection department of your own. With experienced factors, customers can be approached professionally, so that your relationship with your customers won’t be affected.
- Once a factoring line has been set up, you can determine how much you can receive. It all depends on the agreement with your factor, of course, but sometimes you can be the one who determines which of your accounts receivable are factored. This allows you to only receive the money you actually need thus preventing you from paying high fees.
- It’s not a loan. A factoring service won’t affect your credit, because technically you’re selling your accounts receivable to the factor. You’re not getting a loan.
- You can use the money to solve your cash flow problems. You can use the money to pay for overhead and meet payroll, buy supplies and foster growth.
In general, it all depends on the factor you choose. Factoring for small companies can work as a short term measure, but others consider this a long term solution and benefit from the collection services and the credit investigative services offered by the factor. Sometimes factoring is all that’s needed to save a company from the brink of disaster.