When your small business or mid-sized company needs working capital with flexibility or fast financing, factoring companies provide needed cash flow. Factoring is most often advertised as a way to receive instant cash on your company’s receivables. A factoring company takes on the burden of waiting for accounts receivable invoice payments and in return, provides your business with a timely cash advance. This is a flexible and fast financing alternative to traditional bank business loans.
There are several reasons why companies decide to use factoring as a financial instrument. Here are ten key benefits that most factoring companies provide:
Instant cash flow
When you provide a product or service on credit, it is common to wait 30 to 90 days on customer payments. That can lead to cash flow problems. When you factor, you receive an advance on an invoice, often within a day. This quickly builds up cash flow, allowing you to add employees, buy equipment, and cover other expenses that help you meet demand.
Firstly, factoring has the flexibility and capacity to help your company grow at a faster pace than if it were self-funded or backed by a loan. In addition, factoring is also easy to set up. But, instead of shopping for a traditional bank loan, you can open a factoring account within days. Unlike bank terms, there is no limit to the amount of funding from a factoring company with a strong capital structure. The factoring volume can increase from thousands of dollars to millions of dollars within months.
Back office solutions
Collecting payment from customers can be taxing on your company’s time and overhead. A factoring company takes over that role with collections specialists who will follow up with your customers until they pay the full invoice amounts. Many factors also offer online accounts that allow you to track real-time customer payments. This frees up time for you to serve customers, seek out business opportunities, and not worry about getting paid.
Fees and Terms
Before entering into a factoring agreement, pay close attention to the terms of the contract and the fees the factor will charge. These can vary greatly depending on the factor and the industry it serves. Some factoring companies only charge a flat factoring fee, which is a percentage of the total value of the customer invoices you sell them. Other factors charge additional fees that cover money transfers, shipping, collateral and other costs of doing business. Make sure the factoring company you work with is up-front and transparent with you about its fee structure. A long-term contract with a factoring company can be desirable if it includes a price break or flexible rates. Many factoring companies will adjust their rates based on increased factoring volume or competitive offers from other factors. The industry standard for most factoring agreements is a one-year contract. With most factors, that contract will automatically renew unless you give the factor a 60- or 90-day notice.
You want to find a factoring company that has experience in your industry and the capital structure to fund your company as it grows. While there are a lot of factoring companies to choose from, many of them are recent start-ups with very little experience. Before entering into a factoring agreement, research the factor’s history and background providing financial services in your field. As your company grows, the funding of your customer invoices should grow with you. Find out as much information as you can about a factoring company’s capital structure and client base. What is the factoring volume of their largest client? What is a typical account size? Is there a limit to how many debtors the factoring company can take on? Factoring companies that have been in business and have served your industry for several years are usually a better bet than start-ups.
New companies often need financing to get up and running. But with no history, balance sheet or cash flow statement, they will not qualify for asset-based or cash-flow lending. Factoring does not have these requirements because it is based on the credit history of a company’s customers. A factoring company will examine your customer credit scores, payment patterns and overall financial health before agreeing to offer financing. How long your company has been in business is not typically a major concern to the factor.
Many factoring companies will have access to credit data and days-to-pay information on companies that may become your customers. Some factors even have their own rating systems for companies in your industry. This resource allows you to make informed, calculated decisions about new and existing customers.
Factoring is not a loan. The financing comes through as your company accumulates invoices and is settled as soon as your customers pay in full. With recourse factoring, the factoring client does assume the collections risk if its customers default on payments. But most factors will allow you to “work off” that amount by withholding a portion of future cash advancements or reserve payments.
Recourse and Non-Recourse Factoring
Before your company starts factoring, it is important to know the difference between recourse and non-recourse factoring. You need to decide which type of factoring is the best fit for your company and its customers. With non-recourse factoring, the factoring company assumes all of the credit risks for the collection of the invoice. Recourse factoring means that you, the client, are ultimately responsible if the factor cannot collect on your customer invoices. Recourse factoring has some benefits. It is less expensive than non-recourse factoring. Having a customer default payment under a recourse agreement does not mean that you have to pay the debt out-of-pocket. The factoring company may withhold a portion of future cash advances or reserve payments, putting the money in an escrow account until the debt is settled. It is to your advantage to find a factor that offers both recourse and non-recourse factoring, as some of your customers may be better candidates for recourse factoring than others. A factoring company with a strong credit team can also help ensure that you are working with good customers. This relieves some of the pressure of “being on the hook” for bad debt
There are more benefits to factoring than just increasing your company’s cash flow. A factoring company will handle collections on your customer invoices, saving your company time and resources. Factors can also provide credit information and evaluation of companies in your industry. The best factoring companies in the marketplace put a premium on accessibility and customer service. They offer online accounts that allow you to monitor your factoring volume and payment trends from your customers. They match you with a single representative to address concerns or any questions you might have about your factoring account. When shopping for factoring companies, make sure you find one that offers additional products, as well as a level of customer service that can help your company make good business decisions and grow.
With over 15 years of experience serving companies across North and Latin America, in a range of industries and situations, Summar Financial has the know-how to be the right choice for factoring. We count with customized factoring programs, designed to meet the unique cash flow needs of each client. To learn more about why using factoring is the right decision for your business, Call us at (786) 406-73300, or Contact Us Now.