A Beginner’s Guide to Factoring
If you’ve been looking for a way to maintain a healthy cash flow without putting your small business into debt, then factoring might be the perfect alternative funding option for you. If you work in a business that relies largely on completing orders (such as trucking, manufacturing, or other transport and production industries), then you know how real the cash crunch can be while you’re waiting for customers and clients to pay their bills. This arrangement can help to eliminate the weeks and months of waiting you’ve struggled with, and get your company back on the track to success.
How it Works
Typically, after you complete an order with a customer, you send out an invoice. Usually, your customer is expected to pay these back within a month. However, this means your business isn’t turning a profit from the job for a whole month, leaving you with a huge gap between investment and return that’s likely to prevent you from investing in more revenue-boosting projects.
Factoring eliminates this issue by getting you the cash you want much more quickly, usually within days. You work alongside a third-party company that, after checking your company’s credit, offer you an up-front payment for your unpaid invoices. Later, this third-party company will collect payments from your clients.
How it Helps Business
By getting you the cash you need without having to wait for weeks on end, factoring is a great way to avoid issues with a sluggish cash flow, such as being unable to meet payroll or handle more incoming projects. After all, more projects means more money in the long run, so the more you’re able to invest in, the better.
It’s also a great way to get your business the cash it needs when it needs it most without taking on a huge amount of debt. Unlike your traditional bank loan, having your outstanding invoices factored doesn’t burden your company with monthly payments. The company handling the arrangement will simply claim a small percentage of the total payment and pass along the rest of the cash to you.
Bookkeeping will also be a much easier process. Rather than worrying about dozens of smaller transactions, you can simply record your larger transactions with the third-party company you choose, which are far easier to keep track of.
Overall, factoring is an excellent way to get your business the cash it needs, when it needs it the most. Speaking to a professional can help you decide whether or not this is the right move for your small business, and find you an excellent company to work with.