What is Factoring: Business Finance not Algebra
I think we all cringe to a certain degree when we think about the good old days of being in school and having to sit through algebra or any other math class for that matter.
Now that you’ve entered the adult world, you’re probably cringing if you own your own business and you have to plan out your company’s cash flow.At the end of the day…….we all know where this cash flow comes from. It’s not rocket science or algebra for that matter……… It comes from converting your accounts receivables to cash.
Of course we all know it can take up to 30, 60, and even 90 days for your customers to pay. This can seriously cramp your company’s cash flow and make it really difficult to plan out your company’s expenses:
- Payroll
- Inventory purchasing
- Business development.
The Solution………………………..
There is really a simple solution to your cash flow dilemma.
If you have customer’s that would be deemed credit worthy………..then you may want consider a factoring facility.
What is factoring you ask? Factoring is where you simply sell your accounts receivables to a third party otherwise known as a factor.
Advance rates vary but are typically around 80%. Once your invoice is paid, then you get the remaining portion back less any applicable fees.
Factoring is really a great way to close the gap between when you bill an invoice and your customer pays.
The Reasons………
There really are a handful of reasons outside of improving cash flow that you should consider investing in a factoring program. I thought I would pass along some of those to you.
- Closing the Gap: As I mentioned, factoring really helps bridging the gap between when you invoice your customer and when the cash is collected.
Many companies will work as hard as they can to stretch payments to you. Like I mentioned, customers can pay upwards to 30, 60, and even 90 days. There’s no way in the world you can adequately pay the bills if it’s taking that long to collect your receivables. Face it you have inventory to purchase, employees to pay, and even try to grow your business. Yes…..growing your business takes money as well.
So often I’ve seen that a lot of business owners struggle with keeping their cash flow organized. It almost always comes back to one point……trying to adequately manage your receivables, which leads into my second point.
- Accounts Receivable Management: If you feel you have a difficult time staying on top of your receivables collections, the factoring company also keeps a close eye on your factored receivables.
They want to make sure invoices are paid as well. In their due diligence process the factoring company at times finds out if there are issues with invoices and can inform you quickly if there are any issues.
- Not a Long Term Commitment and Won’t Break the Bank: A factoring facility is considered short term financing. If you look into investing in a factoring facility, then you’re not looking at a long term commitment to a bank.
The other thing too is while yes there is a cost associated with improving your cash flow……it won’t break the bank. Depending on the factoring company you choose to go with fees can be based on how far an invoice ages out. If you choose to not factor all of your receivables then maybe consider only factoring your customers that pay the fastest. It could save you in factoring charges all the while improving your cash flow.
To successfully run a business, cash flow management is key. Investing in a factoring facility is a is a great way to help manage and enhance your cash flow. When you do business with a third party factoring company you will definitely find easier to find the cash flow assistance you need.
………………..and believe me when I tell you……. It’s not algebra!