Offering credit terms is difficult
Although customers are paying their invoices within the guidelines of their contracts, many small businesses cannot afford to wait that long for payment. In reality, small companies offer payment terms because their customers demand it, which leaves them no alternative. They either offer terms or their client goes elsewhere. This can create cash flow problems for companies that need to get paid sooner in order to cover their operating expenses – or in order to invest in growth.
Factoring solves this problem
Factoring companies solve this problem by financing your open invoices from credit worthy commercial customers. From a cash flow perspective, this provides immediate funds that can be used to operate the company or to take on new business. These transactions are self-liquidating, which means that they close once your customer pays the invoice in full. The factoring company charges a fee for this service.
How are transactions structured?
There are many ways in which a transaction can be structured. However, most transactions use a two installment format. The first installment is called the advance and covers about 85% of the invoice value. The 85% figure is an average, and advances can range from 70% to 95% depending on a number of criteria. The advance is wired to your company as soon as your invoice is accepted by your customer.
The second installment is called the rebate and covers the remaining funds that were not provided in the advance. In the case of an 85% advance, the rebate would be 15%, less the funding cost. The rebate is wired once the transaction settles when your customer pays in full.
Why is a factoring company a better option?
What makes a factoring company an ideal option is that their plans are easier to get than conventional financing. The application process is faster and simpler. Most clients that successfully complete the application can get funded in about a week, though this varies based on circumstances. This makes it an ideal solution for companies that are going through an unexpected financial hardship or cash flow crunch and need to cash their open invoices quickly.
Who qualifies for this type of funding?
Qualifying for receivables financing is relatively easy. The most important requirement is to have invoices from credit worthy commercial customers. They are the main collateral that the finance company uses and are the backbone of the transaction. Most providers will check the credit worthiness of your customers thoroughly – usually through a credit bureau. You can learn more about customer credit worthiness by going here. Also, your invoices must be unencumbered and your company should not have serious legal/tax problems. Small companies whose biggest asset is a good client list with solid invoices can usually qualify.
Choosing the right company
However, selecting the right factoring company to fund your business can be difficult. There are many providers, many of which a small and medium sized companies. How do you determine who is the right option for you? Well, it’s a matter of following a structured selection process and doing it in the right way. If you are looking for a provider – here is an article on selecting the right factoring company.
Working with a receivables factoring company provides an alternative to working with conventional financial institutions that have unattainable lending standards.