The use of factoring financing has increased in popularity in recent years. Although it is usually promoted as a very flexible solution, which is true, it should be noted that it can only be used successfully in certain situations. This short article will help you determine whether invoice factoring is the right solution for your company.
What specific problem do you have?
Companies go out to the marketplace to get financing because they have a specific business problem that they want to solve – they need to buy equipment, property, make payroll, pay suppliers, or cover many of the other expenses that companies incur. With this in mind, what is the specific business problem that factoring your invoices will solve?
Invoice factoring helps companies that have cash flow problems because they can’t afford to wait 30 to 60 days to get paid by their commercial customers. This problem arises from the fact that most commercial sales are done on terms, which means that you deliver the product/service now, but get paid for it later. Few companies can afford this.
As a rule of thumb, financing invoices should be able to help your company if the following are true:
- You have credit worthy commercial or government customers
- Your customers are taking 30 to 60 days to pay their invoices
- You need the funds sooner to cover ongoing operational expenses
Who uses factoring?
Some examples of companies that use this type of financing are staffing agencies that need liquidity to meet payroll, trucking companies that need money to pay for fuel and repairs, distributors that need to pay suppliers, and many other types of businesses that have ongoing operational expenses. Now that we know what problems are solved by receivables financing and who does it help, the next question to ask is how does it work?
How does it work?
Most factoring transactions are structured to advance money to your company using your invoices as collateral. The finance company advances anywhere between 80% to 90% of your outstanding accounts receivable as soon as you invoice your customer for completed work. Your company gets the remaining 20% to 10% (less the fee) as soon as your customer pays the invoice on their regular schedule. Basically, the transaction accelerates the collection of your revenues in exchange for paying a fee to a financing company.
Easy to get – and flexible
One of the advantages of factoring over other financing solutions is that it’s easier to obtain. Usually the biggest requirement is to have commercial customers with good credit and have a well-run business. But the biggest benefit from factoring comes from its flexibility – the line is indexed to your sales and will increase as your sales grow, as long as you meet the factoring criteria. This is an important advantage because the line can be increased quickly to provide quick funding for a large opportunity. This provides you an important competitive advantage that allows you to capitalize on new opportunities.