What Is Factoring And How Does Factoring Work?
This Blog On What Is Factoring Was Written By Gustan Cho NMLS 873293 Of Gustan Cho Associates Commercial Mortgage Information Resource Center
Many business owners ask What Is Factoring And How Does Factoring Work? Factoring is when a company sells its accounts receivables or invoices to a third party vendor which is normally a commercial business broker which is also known as the Factor. The third party business broker, or factor, buys the accounts receivables from the businesses who owe for the invoices. Factoring is also known by most business owners as accounts receivable financing.
Most businesses offer their customers a 30 to 60 days of credit for them to pay for the services they have performed or goods that they sold. However, by doing this, it puts a big strain on their cash flow and cash is king for most businesses. Many companies decide on Factoring so they can get access cash quickly on the accounts receivables they have instead of waiting sixty days for their clients to pay up. When a company factors, it allows them to get access to cash much quicker than the 60 plus days they need to wait and do not have a strain in buying more inventory, paying employees overtime, and not have a restraint and stress on cash flow.
How Fast Are Accounts Receivables Funded
If you are a business who needs fast cash due to one reason on another and have accounts receivables, you can Factor your accounts receivables to a business broker who offers factoring services and that broker can get you a certain percentage of the value of the accounts receivables within 24 to 48 hours. The factoring business broker will collect all of the accounts receivables, then deduct its share of the fees and interest they charged you, and return the balance left over to you.
Why Do Businesses Factor?
Factoring is a big business and many businesses need this service as part of their business model. The delay in a business collection their accounts receivables can hinder the operations of any business because of the limitations of cash on hand in order to meet operating expenses, funds for inventory, or immediate emergency high ticket repairs. Credit is extremely important not just to consumers but businesses as well. If you are a business owner with a reputation of not paying your vendors or creditors timely, word will spread like wildfire. If you had a stellar month where you had to deplete your reserves in order to fund more products but did not have any invoices coming your way for 60 or 90 days, you would be in trouble paying for your minimum monthly debts for that month. How would it look if you did not pay your electric, gas, water, suppliers, vendors, and employees. This is a perfect example where Factoring is a necessity for any business to be able to get a cash advance from the invoices they have.
What Are The Benefits Of Factoring
What is factoring and the benefits of factoring? The main reason for any business to factor is to get immediate cash flow by pledging their accounts receivables and/or invoices. Why do businesses not just take cash on delivery? Because their competition offers a time frame to be able to pay the goods and services and in order for any business to remain competitive, they need to offer perks like a 30 day to 90 day credit limit. By doing this, it adds a major burden on the business that is extending credit and these businesses need to rely on factoring. Instant and fast cash flow is the major benefit for factoring and the main reason most businesses decide to factor. Here are the benefits of factoring for businesses:
- The factor collects your accounts receivables and will take out their share and return the fully paid invoices to the business who contracts with them. This relieves the accounts receivables department of your business and the back office support staff and relieves employees to concentrate on sales.
- One important factor about factoring is that Factoring is solely based on the credit of the client’s character and credit and not your own business credit or payment history.
- Factoring companies can custom design your factoring system and model so whenever you need capital via your accounts receivables or invoices, the model is in place where you can get fast funding.
- What Is Factoring? Is Factoring A Loan? Factoring is not a mortgage or commercial loan. It is simply an advance of an accounts receivables or invoices and accounts receivables and invoices are assets that you are fronting in lieu of payment upfront. Factoring does not incur any debts to your company.
- All Factoring is scaleable where the funding can be increased as your accounts receivables and invoices grow.
What Is Factoring And What Types Of Businesses Use Factoring?
Every type of company in all industries use factoring as a means of increasing their business cash flow. Here are the types of industries that commonly use Factoring:
- Grocery Stores
- Government Contractors
- Oil And Gas
- Health Care Industries
- Staff Agencies
Businesses use factoring to get cash from their invoices and is used for the following reasons:
- Purchasing New Equipment
- Buying Inventory
- Adding Employees Or Funding For Overtime
- Repairs And Remodeling
- Emergency Funding
- Expanding Operations