Get the Facts on Factoring
Heard about factoring but have no idea if it’s right for your business? You’re not alone. This is a practice that many entrepreneurs benefit from but many others know nothing about. Before you go with another type of business loan, you should learn about how working with a factor could benefit your company and create the cash flow you need to thrive.
What’s the Deal?
When you work with a factor, you create a financial middleman that reduces the amount of time you wait for bills to be settled. For instance, say you have a practice where you bill patients after they receive treatment. Sometimes you wait for one, two or even three months for invoices to be settled. In the meantime, you still have to pay employees, rent and a million other bills. You’ve done your work, but your company is hurting for money as though you hadn’t.
This is where factoring comes in. In exchange for a small fee, you sell these outstanding invoices to the factor. That company then sets about collecting the balance from your clients while you get back to doing the work you’re paid for. You can keep your cash flow steady and spend far less time dealing with collections and things of that nature.
What’s the Catch?
Aside from the fee you pay to the factor, there aren’t really any strings attached. In order to be considered for this type of financing, you’ll have to prove that you have creditworthy clients so the factoring company won’t worry about getting stiffed. You also need to make sure that the factor charges a reasonable fee in exchange for buying your invoices so that you aren’t undercutting your enterprise. As long as your business is steady and your customers are dependable, this is a very viable form of financing.
Who Benefits Most?
When done right, working with a factor is beneficial for all parties. You don’t have to deal with harassing clients about unpaid balances; your customers pay the same amount as they would if the money was going to you; the factor gets to take a small payment for services you’ve rendered. The biggest winner is probably your business, as you don’t have to deal with a shortage of cash flow while waiting for payments to trickle in.
When you understand how factoring works, you can decide whether or not it’s right for your company. If selling invoices in exchange for quicker payments seems smart, find a factor and get started.