What is Factoring?
Factoring, also known as invoice factoring or accounts receivable factoring, is a business financing option where a company sells its unpaid invoices to a third-party financial company, known as a factoring company, at a discount in exchange for immediate cash. This helps businesses improve their cash flow and ensures they don’t have to wait for customers to pay their invoices. Factoring is a way to access quick funds by leveraging your outstanding invoices, making it a popular option for businesses in need of working capital.
How Does Factoring Work?
The process is simple:
1. Provide your goods or services to your customers and send them invoices.
2. Submit your unpaid invoices to the factoring company.
3. The factoring company pays you an advance on your invoices, typically 80-90% of the invoice amount.
4. The factoring company handles collecting payment on the invoice from your customers.
5. When your customer pays the invoice, the factoring company pays you the remaining balance, minus their fees.
How is Factoring Different Than a Loan?
Unlike a loan where you borrow money from a bank and repay with interest, factoring involves selling your outstanding invoices to a company (the factor) at a discount. You get immediate cash but forgo some of the invoice value, while the factor collects directly from your customers and assumes the credit risk. It’s faster and less credit-dependent than a loan, but the cost is the discounted value of your invoices.
Is Factoring Right for my Business?
Invoice factoring can be a good option for businesses that:
- Have long payment terms from their customers.
- Need to improve their cash flow quickly.
- Don’t qualify for traditional bank loans.
- Have a high volume of invoices.
Does Factoring Hurt my Credit Score?
No, invoice factoring is not debt, so it will not hurt your credit score. In fact, it can actually help your credit score by improving your cash flow and making it easier to pay your bills on time.
What Types of Businesses Utilize Factoring?
A typical business that sells or provides services to other businesses’ and extends credit will have ten to twenty percent of its annual sales tied up in accounts receivable at any given time. Just think for a moment about how much money is tied up in 60 days’ worth of receivables, and then think about what a business could do with that cash if it were on hand. You can’t pay the power bill or this week’s payroll with a customer’s invoice; but you can sell that invoice for the cash to meet those obligations. A company needs consistent and dependable cash flow. Any company, whether starting out, experiencing a growth phase, or is mature in years, needs good cash flow. Factoring can be one of the best ways to get it. These industries below benefit greatly from the use of factoring services:
|Cable & Telecom
What Types of Businesses Don't Qualify for Factoring?
Businesses that cannot utilize factoring are those that provide retail services to the public or receive immediate payment by cash or credit card. As a general rule, retail establishments such as restaurants, stores and gas stations do not qualify for factoring.
How Much Does Factoring Cost and How is it Calculated?
The cost to the Seller for Factoring their invoices is generally a percentage of the gross amount of the invoice that can be structured in a variety of ways. As calculated monthly, that percentage is generally between 1.5% to 6.0%, depending upon the volume and number of the invoices being factored, the creditworthiness of the Debtors and the amount of time that the invoices remain outstanding.
What are the Benefits of Factoring?
There are many benefits of factoring, some of which are:
- A Factor generally makes their credit decisions based on the strength of the Account Debtor’s, not the Seller’s financial strength or credit standing.
- Factoring offers flexibility and access to capital that traditional bank financing cannot. Unlike banks, Factors look at the quality of the collateral to fund.
- Factoring is a financial tool that increases cash flow and working capital and helps avoid problems from slow paying customers.
- Factoring allows you to take advantage of profitable opportunities requiring additional cash (i.e., larger orders from well-established customers.).
- Factoring quickly turns your unpaid invoices into immediate cash instead of having to wait 30 days to 60 days or more for payment.
- Factoring obtains working capital without dilution of ownership and control. No need to give up equity in your business to grow sales – no Shark Tank!
- Factoring provides operating cash on a controllable basis. You choose how much you factor and when.
- Factoring can help establish or improve a company’s credit standing by providing much needed working capital to your business.
Where Can I Learn More About Factoring?
There are many resources available online that can teach you more about invoice factoring. You can also talk to a factoring company representative to get more information. Here are some additional invoice factoring resources:
How Do I Find a Reputable Factoring Company?
Ask for recommendations from other businesses, do your research online, and compare rates and fees from different companies. Make sure the company is licensed and bonded, and read the contract carefully before you sign. Finding a reputable factoring company requires research and careful selection. Look for established players with proven track records and transparent pricing, like Quickpay Funding. We cater to a variety of industries and prioritize customer focus, offering cutting-edge technology and dedicated support. Don’t gamble with your cash flow.
Why Should I use Quickpay Funding?
Quickpay Funding, LLC was founded to provide small and medium-sized businesses with the funds they need for success. Our driving mission is to offer best-in-class customer service and timely credit decisions. We can help you secure the capital needed to expand your business, make critical tax payments, meet payroll obligations, and shorten the turnaround of your accounts payable and take advantage of supplier discounts.