Probably the most basic question you could ask – what is factoring? You might not be surprised to learn that most small business owners don’t know what it is or have some vague notion about it based on snippets of information.
In a nutshell, factoring is a commercial finance transaction. A very simple one that allows a business owner to gain access to working capital on an ongoing basis by leveraging work they have already completed.
When a business works on a contract and submits an invoice to their customer with payment terms, they are essentially loaning money to their customer. They did the work, the customer owes them for the work completed and now has an obligation to pay. Hence, a loan to the customer.
What the factor is doing, is purchasing that “loan” in the form of an invoice – wiring the money into the companys’ account and waiting for the period of time until the invoice gets paid. In other words, the invoice goes out, the business gets paid right away and the factor waits the 30 – 40 days to get paid back. This can happen as frequently or infrequently as needed by the business.
If you are considering factoring your invoices remember these benefits; the decision to fund an invoice is based on the creditworthiness of your customer. We look up the customer to determine whether the “loan” you made to them is any good. What is the likelihood the invoice will be paid without any issues?
And the other main benefit; you are not entering into a loan situation with the factoring company, meaning you don’t have to worry about a loan you have to pay back eventually. Your customer pays the invoice to retire the advance made on the invoice.
Call our office now to see if factoring is an option that will help your company grow.