As a manager or a business owner, do you ever have times where the business’ finances keep you awake at night? Do you ever worry about making payroll on Friday? What are you going to do about that critical vendor that is demanding payment? If you haven’t experienced that at least once, then you’re a rare case in the world of small businesses.
Many times, a business that’s facing these problems looks great on paper. It’s profitable, revenues are up and the future looks bright, but there’s a hidden problem - a cash flow problem.
Without cash flow, you can’t pay your bills. Slow paying customers and a long list of payables that need to be met before invoices are due creates a cash crunch. It’s in these situations that factoring shines.
What is Factoring?
Factoring is a tool that allows you to unlock the cash that is tied up in your accounts receivable. With factoring, you’re able to leverage what is likely the largest current asset on your books – your accounts receivable.
What is factoring? Factoring is a process wherein you assign invoices to a factoring company. The factor will advance you a certain amount up front – usually 80%. You then receive the balance, less the factor’s fee, once the invoice is paid.
In some ways, factoring is no different than many other forms of financing. It gives you access to funds you can use to run your business. Factoring, though, provides flexibility unlike any loan and is specifically designed to meet the needs of small and mid-sized businesses.
Unique Benefits of Factoring
Factoring provides far more than financing for your business. A factoring company steps in and becomes a partner in managing your receivables. The factor is relying on your customers for payment. Because of this, they have a strong interest in the future performance of your customer base.
When you submit a customer for factoring, the factoring company will perform an in-depth review to ensure the company is creditworthy. You get the benefit of having an in-house credit department without the expense.
Do you know if you have any high risk customers with an outstanding balance? If you knew they were high risk, would you be as willing to extent credit to them? Every day, businesses unknowingly send thousands of dollars of product out the door and have no idea if the customer has the financial ability to pay.
When you work with a factor, you’ll have a pulse on the credit quality of your customer base. You’ll have the knowledge to make an informed decision when you consider providing your product or service on terms. You’ll significantly reduce your losses from bad debt. What is factoring? Financing that provides risk assessment on your customer base.
When you assign invoices to a factor, your customer will pay the factor directly. When you assign an invoice, your customer will receive a notice that the invoice has been assigned. That notice will have the payment direction for the factoring company.
Since the factor is expecting the payment, they’ll know when an invoice goes past due. They will track all open invoices just as you would on your own AR aging. When an invoice starts aging out, the factor will start following-up with the customer to find out when they can expect payment.
Any contact with your customer is always done in the most courteous manner. They’re still your customer. The factor is just a third party that has entered into the transaction. This process is an added value to you as the time and money that the factor spends on collections is time and money that doesn’t come out of your pocket. What is factoring? Financing that provides collection services.
Finally, factoring gives you flexibility unlike any other financing. You are in full control of the process. You decide to assign one, two or all of your invoices. This gives your control over the amount of funding you receive and the associated cost.
What is factoring? Financing that is more than financing. It is a whole suite of services that helps you run your business better.