When you factor your debts the factoring company gives you up to 85% of any outstanding invoices straight away. They also take the burden of collecting your debts away from you. For this service they charge around anywhere between one and three percent of the invoice value.
I used factoring in the late nineties when I was struggling to manage the growth of my packaging business. Some of my biggest customers were taking a long time to pay their invoices and as their business increased the only way I could raise money to keep supplying them was through factoring.
Initially my fee was 2% but after one year the factoring company reduced it to 1.5%. This fee not only paid for the collection of the debt but it also insured it so that if any of my customers went bust I would lose a maximum of five hundred dollars.
The way this works is that before you supply any new customer you submit their details to the factoring company and in return they give you the amount of credit you can offer. All debt supplied up to that figure is insured and anything above it is not. I rarely supplied any customers over their credit limit.
I factored my debts for approximately 5 years. The factoring company only actually made profits from me for 3 of those five years. The other two years they ended up having to pay me more for the insurance payouts than I actually paid them in their fees!
The only problem I had was when they were slightly too strict trying to collect my outstanding invoices! I almost lost a customer but after a little bit of delicate negotiation we managed to save the day.
Factoring has a got a really bad name in the industry but I do not understand why. It's a great way to boost your cash flow if suddenly you get more orders than you can handle or your business starts to grow fast. It really only works well when the value of each invoice is high.
If your average invoice value is less than a couple of hundred dollars you will struggle to find a factoring company that will accept your debt. The main reason for this is that they take a small percentage of each invoice and at this level their percentage works out to such a small figure that it is no longer viable for them to make money from you.
As usual with all these types of articles the standard rules apply. Do not base your decision to factor your debts based on this article and always seek expert advice from your accountant first before entering into a factoring agreement.
One of the major challenges facing almost any small business owner today is how to maintain and control positive cash flow. And, one of the least understood options for increasing cash flow is factoring. This one tactic alone can help a business meet immediate operational expenses, including payroll, materials, equipment, or even taxes. It is also a great way to quickly fund growth for any small business.
You can raise funds immediately through single invoice factoring, and then take advantage of such discounts when purchasing raw materials, equipment or supplies, so your business grows. This will help you reduce your manufacturing costs.
Here's how it works. A business sells its accounts receivable to a factoring company, which results in the business being able to improve its immediate cash flow. The full amount of the accounts receivable is then collected by the factor from the customer.
Here are some of the benefits of factoring: - Collections: Outsourcing the function of accounts receivable management to another company often times will free up resources, so you and your employees can to focus on doing more business. - Provides working capital: Many companies have the majority of capital tied up in things like their inventories, or supplies. Funding that comes from accounts receivable factoring gives a company the chance to free up capital.
- Invoice factoring provides quick financing: Accounts receivable factoring doesn't require a business plan or tax statements. It's a quick form of cash.
The bottom line is that you won't be giving up equity in your company when you obtain financing through accounts receivable factoring.
How quickly can you receive funding from invoice factoring? Most factoring companies complete funding within 24 hours.
Many people ask if they can be selective in the invoices that they sell. And, yes, you can be selective, because you don't have to sell 100 percent of your accounts receivables. In fact, if you want, you can even sell just one invoice. Many factoring companies have no minimum sales volume requirements, so you can use the service only as you need it. It also works in reverse, as there are no maximum limits either.
In case you are wondering how much you can advance against an invoice -- most companies advance up to 90 percent against each invoice that you sell. The cost of doing factoring involves a professional fee -- and they are typically competitive, however each client's circumstances vary.
In summary, invoice factoring is a highly effective cash management strategy. There are some industries that have been using factoring for many years. For example, the construction industry reports that sub-contractors who often experience cash flow problems use factoring. Factoring allows businesses to obtain funds based on their current accounts receivable.
Both Naz Daud & Kristin Gabriel are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.