Loan Factoring and Your Business
by VENDIREX on 11/11/2014 - 09:50 am |
Tag: Factoring
Many businesses will occasionally find themselves in a position where they need to quickly
increase the amount of cash they have on hand in order to acquire raw materials. This can
become problematic if the company is not able to obtain a traditional loan, especially if the
materials they need are a necessity to complete a project that they have already accepted.
Fortunately, there are some alternative methods available for temporarily increasing cash flow,
including factoring. Get Free Quotes for Factoring
What Exactly is Loan Factoring?
Factoring is not actually a loan, so the phrase loan factoring is a misnomer. Instead, this
process, which is sometimes referred to as accounts receivable financing, enables companies to
receive a fast infusion of cash by selling their invoices to a factoring company.
These third-party commercial financial businesses will purchase outstanding accounts
receivables that have a due date within the next 30 to 60 days. In other words, if you have an
invoice pending for $5,000, you can choose to receive a portion of that money now to keep
your business running instead of waiting for your customer to make a payment in 60 days.
What Terms Do Factoring Businesses Offer?
It is typically possible to complete the setup process for factoring in five days or less, and
you will most likely receive money within 24 hours of the paperwork becoming finalized. The
company that agrees to purchase your invoices will give you an advance rate based on a variety
of factors, such as the credit history of your applicable customers. In most cases, you will be
able to receive between 80 to 95 percent of the outstanding balance.
Keep in mind that you do not assume any debt via factoring, and this unrestricted access to
funds provides a much higher level of flexibility than taking out an actual loan. Additionally, you
will receive the balance of the invoice, minus the factoring company’s fees, once your customer
makes their payment.
What Type of Factoring Options Do I Have?
There are two main types of factoring: non-recourse and recourse. It is important to have a firm
understanding of the difference between these two so that you know exactly what is required
of you. If you agree to recourse factoring, you will remain responsible for making sure that the
invoice or invoices in question are ultimately paid. For example, if you get an advance on a
$1,000 invoice, you will need to pay that money back to the factoring company if your customer
defaults on their payment.
Non-recourse factoring allows you to sell your invoices without taking on any of the credit risk
that is associated with unpaid accounts receivables. This means that if your customer makes
the decision not to pay their bill, the factoring company will pursue them for payment and
end up eating the cost if they are unable to collect. This version of factoring is definitely more
desirable on the surface because it eliminates your risk of ending up losing money. However,
non-recourse factoring typically comes with a larger fee.
How Do The Fees Work?
Factoring contracts are usually renewed annually, and the exact fee amount that you will be
charged will most likely be based around the credit worthiness and monthly volume of each of
your customers. It is also possible that you will be responsible for extra fees that cover factors
such as shipping and money transfers. The reality is that each factoring company can set their
own fees and contract terms, so it is vital to pay close attention to the contract so that you do
not end up losing a lot of money unnecessarily.
Factoring can be used to receive upfront cash for everything from a single small invoice to a
multimillion dollar packet. Although you will end up losing some money to fees, factoring is
much faster than a traditional loan, and it is the perfect option for businesses that are unable to
qualify for traditional financing options.
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