The Basics of Factoring
Researching financing options often means learning about one of the oldest forms of funding businesses, factoring. This option is sometimes referred to as accounts receivable financing and has been used to fund everything from exploration to manufacturing since the fifteenth century. Before you contact a factor, it is a good idea to know a bit about this financing option such as what it is, who can use it, and how to get it.
What Is It?
Accounts receivables are invoices that are outstanding but not overdue and usually involve large jobs where the customer has thirty to ninety days to pay the invoice after receiving the goods or services. This can sometimes put your business in a bind because you have done the work, but not been paid on it, so a factor lends you a percentage of the money you are owed and the debtor, your customer, pays the factor. Sometimes you will receive a portion of the invoice after the debtor has paid the factor because the percentage withheld is more than the fees for the service, and sometimes the factor will only withhold their fees.
Who Uses It?
The types of businesses that benefit the most from factoring include auto repair shops, manufacturers, and even caterers and healthcare facilities. If you primarily get paid through invoices that have thirty to ninety-day terms, then you can qualify for this type of financing. If you do not have many invoices at a given time, then another financing option might be a better fit. Some companies will contract with a factor to handle all of their billing and others will only use AR financing once or twice during the company’s lifetime.
How Do You Get It?
Most of the time the application process takes place on the factor’s website with a quick form and a secure upload of your chosen invoices. The factor will generally give you a decision within a couple of days and the money will hit your account soon after. It is important to apply some criteria to your search for the right factor such as whether the company has experience working with your industry, what the fees are, and what their references say. This can help you get the best deal for your company as well as help you avoid scams.
Factoring is a way to get quick cash for the work you have already done but have not yet been paid for and has been extensively used for centuries. You can use this option for all your invoices or for just a few and you have the ability to choose which ones you use and when.