How a Factoring Business Operates.
There are many ways that small to medium size business can obtain financing. Commercial loans and lines-of-credit are traditional ways that a business can acquire funds to cover recurring expenses or finance capital growth. But an increasingly popular and acceptable method of financing is the cash flow provided through a factoring business.
In the past, utilizing a factoring business to support cash flow was viewed as an emergency measure. The factoring business may have been viewed as a type of loan shark, there to take advantage of a business owner as they struggled to collect payment from customers so they could pay their bills. These days, nothing could be further from the truth.
Every business has assets. Even a start-up company has something of value as soon as they make a sale. The sale goes into the books as a receivable, which is an asset. Of course, there are costs incurred to produce the goods or services being sold and that is where the business owner sometimes runs into a dilemma. In order to remain viable, the business must pay employees, maintain a place of business and, in many cases, purchase materials to manufacture products. This takes cash, and no matter how successful a company is at producing and selling goods or services, they cannot use the revenues from these sales until they receive payment. And as any business owner today will tell you, receivables are getting stretched out further and further.
So how does a business stay solvent while they wait to get paid? Well many will take advantage of the services of a factoring business to improve their cash flow.
The process is pretty simple actually. The business owner essentially “sells” the receivables to the factoring business. In exchange, the factor provides a significant percentage of the value of the receivables or invoices. This is typically 70-80%. The balance is provided once the receivables have been collected. So a company with a $100,000 receivable can receive $80,000 of that almost immediately through a factoring business rather than wait 30, 90 or even 120 days for payment. The balance of the $100,000 is received once all invoices are collected and the business owner will receive the remaining $20,000 less a fee for the factor, which is typically 1-5%.
This practice is much more mainstream than many actually realize. Factoring is a standard part of the trucking industry and major financial firms like CIT and GMAC are heavily involved in the factoring business.
Every business needs cash to operate. Every sale is an asset. A factoring business can help you put those assets to work for you immediately…because later may be too late. |
