An Entrepreneur’s Guide to Factoring for Cash Flow
Are you a business owner faced with a cash-flow squeeze caused by slow-paying customers? If so, there is a way out – it’s called accounts receivable financing or factoring. Many small to mid-sized companies use factoring, so read on to find out how factoring can solve your cash flow problems.
How Does Factoring Work?
When you use factoring, you sell your invoices (accounts receivable) to a specialized financing company (the factor). The factor advances you 70-90% of the total value of your invoices. The amount you receive depends on the age and quality of your receivables. Your customers pay their bills to the factor (not to you). When your invoices are paid, the factor remits the balance owing to you minus the factoring fee.
How will Factoring Help my Cash Flow?
• You get cash quickly – Usually within 24-48 hours. This compares with the 30, 60 days or longer that you have to wait without factoring.
• You can qualify for factoring if you have poor business credit – A bank looks at your business’s creditworthiness; a factor focuses on the financial soundness of your customers.
• You don’t need collateral – You are not taking out a loan; you are selling an asset, namely your accounts receivable.
• You don’t lose any operating control over your business.
• Saves staffing costs – The factor takes on the burden of collecting payments – a big plus, especially if you have overseas customers.
Does Factoring Have Any Cons?
• Cost – You will pay more than you would for a bank loan.
• Stigma – You will need to take appropriate action to inform your customers that you are not using a factor because your business is in trouble.
• Loss of control over customers – the factor may tell you not to keep doing business with customers who pay very slowly.
Grey Hill Capital is an established financing company specializing in factoring. Consult with us to see how we can help you improve your cash flow and grow your business.