If you are asking the question, “What is a factoring company?” You are most likely a small to a mid-sized business owner that is facing a common problem. Most companies that are engaged in B2B (Business to Business) sales invoice on a 30, 60 or perhaps even a 90-day term, creating a cash flow gap.
The Factor Process
This creates a problem for the company providing the goods and services since there is a need to restock inventory, supplies, equipment, make payroll and manage overhead. At the same time, the customer will not make a payment on work already completed for one, two or perhaps three months or longer if they are late in paying.
This is where the answer to what is a factoring company becomes so important. The factor is a third-party service that is able to advance the money on those accounts receivable for a set fee. This advance is typically completed in days and will be up to 80% of the total of the accounts receivables sold to the factor.
Unlike a loan, this is more like an advance. There is no repayment and no interest; rather the factor charges a fee for the service. The fee is deducted from the withheld amount of the invoices, and the residual is then sent to your business after the customer completes payment.
The Advantages
Once you understand what a factoring company is and how it works, is it easy to see the advantages. They include:
- Immediate cash to make payroll, add to inventory, or to hire new people for additional work
- No repayment, so the money received can be used immediately to the advantage of your business
- Transparent rates and fees that are outlined in the agreement
- No ongoing or long-term contracts, but this will vary between factors
Take the time to compare a few different factors. There are differences in rates and fees charged, so shopping for the lowest for both is important.
