This Blog On What Is Factoring And Why How Do They Benefit Businesses Was UPDATED On November 2nd, 2018
Many business owners ask What A Factor Is And How Does Factoring Work?
- Factoring is when a company sells its accounts receivables or invoices to a third-party vendor
- This is done by the 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
In this article, we will discuss and cover what factoring means.
How Does Factoring Work
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
Business owners do not have a strain in buying more inventory, paying employees overtime, and not have restraint and stress on cash flow.
How Fast Are Accounts Receivables Funded
Businesses who need fast cash due to one reason on another and have accounts receivables can Factor their accounts receivables to a business broker:
- Brokers who offer factoring services can get businesses 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 and return the balance left over
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
- This is 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.
Importance Of Credit For Business Owners
Business owners with a reputation of not paying vendors or creditors timely, word will spread like wildfire:
- Business owners who had a stellar month where they had to deplete reserves in order to fund more products but did not have any invoices coming their way for 60 or 90 days would be in trouble paying for minimum monthly debts for that month
- How would it look if they did not pay electric, gas, water, suppliers, vendors, and employees
- This is a perfect example where Factoring is a necessity
Factoring enables any business to be able to get a cash advance from the invoices they have.
What Are The Benefits Of Factoring
What are 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 a 90-day credit limit
- By doing this, it adds a major burden on the business that is extending credit
- 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.
Benefits Of Factoring By Businesses
Here are the benefits of factoring for businesses:
- The factor collects accounts receivables
- 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 business
- 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
- Not your own business credit or payment history
- Factoring companies can custom design factoring system and model
So whenever businesses need capital via their accounts receivables or invoices, the model is in the place where they can get fast funding.
Is Factoring A Loan
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
- 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
Funding can be increased as your accounts receivables and invoices grow.
What Types Of Businesses Use Factoring?
Every type of company in all industries uses factoring as a means of increasing their business cash flow.
Here are the types of industries that commonly use Factoring:
- Trucking
- Transportation
- Restaurants
- Grocery Stores
- Manufacturing
- Government Contractors
- Textiles
- Oil And Gas
- Health Care Industries
- Staff Agencies
Main Reasons Why Businesses Use Factoring
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
Gustan Cho Associates is a national mortgage company with no overlays on government and conforming loans. We also offer NON-QM Loans and alternative financing programs. Please contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
