What Is Factoring And How Does It Work For Your Business?

Posted by John Mauldin on Wed, Dec 19, 2012

Learn all about factoring, or short-term business loans, and how they can improve your cash flow and help you run your business efficiently.In today’s economic environment, it is becoming increasingly difficult to obtain small business financing from traditional banks.

We may be preaching to the choir, but it’s safe to say that this makes running an efficient business difficult. Life is especially difficult when you’re in search of short-term business loans. Short-term business loans come in handy as they help bridge the gap between when invoices are billed and collected. You may have customers that pay in 30, 60 or 90 days. Remember what we have said over and over: CASH IS KING! If you don’t have cash in hand, you aren’t efficiently operating your business.

Slow collections make planning out cash flow very difficult. This model does not work if you like to plan things out. Really, this model doesn’t work for anybody.

So if you are a big planner and you have customers that pay in 30, 60 or even 90 days, your best option is to seek out short-term business financing, which includes factoring. It makes the most sense if you want to plan out your cash flow.

What Is Factoring?
What is factoring, you ask? Factoring is a form of short-term business financing, where you sell you company’s accounts receivables related to creditworthy customers at a specified advance rate (typically around 80%). Once the invoice is paid, then you get the remaining portion back less specified fees.

How Does It Work For Your Business?
By factoring receivables, you are able to bridge the gap between when an invoice is billed and collected. This really makes planning your cash flow a lot easier. You won’t have to worry about:

  • Making payroll
  • Purchasing inventory
  • Keeping your vendors current

There is a cost to pay to factor, but it is a small price to pay to make sure your company has efficient cash flow.

The Benefits
Here are some benefits to entice you to consider a online factoring program:

  • Easy and relatively quick to establish.
  • In some cases you don’t have to factor every invoice. If you have a large order with extended terms, you may want to consider factoring only the invoice related to that order.
  • Depending on the company, you participate in an online factoring program. 
  • Factoring is considered short-term financing. It won’t leave you indebted to a lending institution for an extended length of time.

Some Helpful Hints
Here are some helpful tips when factoring invoices:

  • Factor all of your creditworthy receivables.
  • End quick pay discounts. Factoring gets the cash you need in hand. We’ve seen customers take advantage of the discount even if they’re paying outside of the required time frame. 
  • Consider factoring only some of your receivables, relating to your more creditworthy customers. While your more creditworthy customers may pay quickly, you’re still meeting your immediate cash needs while minimizing factoring costs.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Click below or call 888.833.2286 to speak with one of our small business finance consultants.

Speak To A Cash Flow Consultant

Tags: Invoice Factoring