Most businesses run on a tight budget and the problem is more so if they have large customers buying products on credit. Their money is often locked up between the time they sell their products to their customers and the time they receive the payment, which is normally 30 to 90 days. This is where a factoring company can step in and solve many problems.

A factoring company is a third party that will "buy" your invoice, which you have issued to your customer after making a sale. They will reimburse you 60 to 90 percent of the invoice amount electronically with 2 days and the balance amount after they get the full payment from your customer, minus a factoring fee. This factoring fee is usually between 1.5 to 15 percent of the invoice value and will depend on factors such as your customer credit rating, the number of credit days and the total volume of business generated by you. The higher the values of your business, coupled with lower credit days, the lower the factoring percentage applicable.

By offering this financial service, the factoring company solves many of your problems in one go. It drastically improves your cash flow, and this money can be utilized in paying off salaries, suppliers and even making cash or bulk purchases to avail of special discounts. In a way, if offers you a flexible loan without you giving any collateral or documents such as profit and loss statements, which you would have to do so in case of a bank loan. It does not also try to take over your business, as would be the case if you were funded by a venture capitalist. The factoring company also frees you from the tension of payment collection since most of the good factor companies take on collection upon themselves. The amount of time thus saved can be utilized for other activities and help you concentrate more on increasing sales.

Since you will be getting most of the invoice amount immediately, you can also go in to take large orders from your customers. Your factoring company will also give you regular collection statements and receivables statements. Your factoring company hence becomes an extension of your company by taking care of the entire credit department. Some factoring companies have now started advertising about custom invoice packages that let you send your invoices to your factoring companies through the Internet. With this facility, both you and your factoring company can be up-to-date on the financial status of your company. It also saves a lot on courier charges and chances of documents being misplaced become low.

An efficient and courteous factoring company can also be an asset since they could improve your collections from customers, thus presenting a professional face to your customers.

In short, what a factoring company does for you is, it improves your cash flow, gives you a variable loan against your sales, handles your collection department, frees up your credit staff and hence enables you to enter into a positive sale cycle since the more you sell, the more money you receive against your receivables, thereby again encouraging you to sell more.