By: Chris Lanchech
If your company is in dire need of ready cash for your working capital, one way of securing that money is by factoring invoices that your business has accumulated and has not yet collected on. This is just one way of securing quick cash for the company (other typical ways include securing a business loan or establishing a line of credit), and although it is not as common as other options, many companies have found it compatible with their particular needs and circumstances.
What is Factoring?
If your company offers credit to customers, then the accounts receivable (which in the accounting books of customers are labeled as “accounts payable”) constitute part of the company’s assets. It has not been turned into cash just yet—and this is what a factoring company does in a very short amount of time. Instead of waiting for the customers to pay the balance of their accounts, your company can sell those invoices at a discount. For example, your company can receive $900 right away for an invoice that calls for a $1000 payment. When the customers pay their invoices in full, that payment goes to the factoring company.
Advantages of Factoring
Quick ways of securing cash for companies have their own sets of pros and cons, and factoring invoices is no exception. These are the advantages that your company receives should it decide to factor its invoices to a factoring company:
- Some businesses may find it difficult to get a small business loan or establish a line of credit. Invoice factoring is much more possible to secure.
- This practice allows the company to receive the money it needs much more quickly than waiting for the customers to pay the balance of their accounts. Typically, your company should receive the money about two to five business days after your agreement with the factoring company has been finalized. Some companies even receive their money in as fast as 24 hours.
- The money your company will receive is generally larger than the amount you can get from a business loan.
- Invoice factoring also saves your company the effort of collecting the accounts receivables, as the work is done by the factoring company.
Disadvantages of Factoring
There’s no such thing as a perfect solution for getting large amounts of cash for a company, and factoring has its downsides as well. This is especially true if you have less than ideal customers. If they are slow to pay or if they have a dubious credit history, this can affect the fee that the factoring company will require.
Your customers must also pass the standards set by the factoring company; if they do not or if the factoring company thinks your customers are unreliable then you may receive a lower percentage of the accounts receivable up front.
But in spite of the drawbacks, factoring your invoices via a factoring company will be beneficial for your business. It will provide you a steady flow of cash that your business needs to operate and grow.