Sometimes your company simply needs cash as soon as possible. Receivables factoring allows you to raise working capital in less time and with fewer hassles than a loan. However, receivables factoring should be a last ditch effort for small businesses, as you might needlessly sacrifice your hard-earned profits. If you absolutely need working capital before your invoices are paid, here is a basic guide to receivables factoring:
The Ins and Outs of Receivables Factoring
Invoices for immediate capital
When you participate in receivables factoring, you are essentially selling your accounts receivables or invoices to a factor for less than the original invoice’s value. Factors buy these invoices at a discount, then collect the full payment from your customer. After this transaction, you have immediate cash, and the factor has an impending profit to make from the payment. When purchasing the invoice, the factor pays you a percentage of the invoice paid value, known as the advance. The advance typically amounts to 70-85% the worth of your invoice. The factor then holds onto the remainder as a reserve, which is paid to you upon fulfillment of the invoice, minus any factor fees or charges.
Receivables factoring advantages
Factoring is a relatively instant solution to cash flow troubles, as you can trade your invoices for cash in as little as one day. As such, receivables factoring can allow you to mobilize in several ways. The cash can help you off pressing debts, kickstart an expansion, purchase necessary equipment or simply keep your daily operations running. Factors usually have their own collection services, which crosses one huge burden off of your to-do list, as most small businesses are grappling with delinquent payments. This allows management to focus on other projects. In addition, receivables factoring generally keeps you clear of credit checks on your own company. Factors are more concerned with your customers’ credit worthiness, as they want to make sure that the invoices are paid.
Receivables factoring disadvantages
First and foremost, you are reducing your own profit margin through receivables factoring. The factor’s financing fees can quickly add up, which means you could lose a good chunk of your invoice’s value. Some factors require you to commit a minimum amount of invoices, so you may have to include even your most desirable invoices in the deal. You should also consider the quality of a factor before starting a relationship. If the factor decides to collect from customers directly, you are putting your own business relationship at risk. Your customers may blame you for the bad behavior of a pushy factor.
Choosing the right factor
If you move forward with receivables factoring, choose a factor carefully. How factors handle business can affect your own operations. Review the factor’s reputation for collecting payments efficiently, handling disputes and inquiries and customer service. To help you make a smart choice, Universal Funding World provides a list of important questions for factors. For many people, the most convenient place to start receivables factoring is the Receivables Exchange. The Receivables Exchange allows you auction off your invoices while setting your own sale terms, including your desired minimum advance and maximum fees. You can set the auction to last as long as 10 days, with a buyout option, which allows a buyer to agree to an offer and end the auction immediately.
When it comes to working capital, invoice factoring is simply one of many avenues to consider. Luckily, Funding Gates is here to help you with all of your accounts receivables needs.