When your business is experiencing hard times, factoring can help pull you out of the mud and keep on pushing through the storm. You’ve heard talk of factoring in the past, but how much of what you’ve heard has been reliable information? Factoring companies can help your business resolve some immediate financial problems, but there are some things you’ll need to know about factoring before you get involved.
- How Factoring Works
Essentially, factoring works by giving you the option of selling your outstanding invoices to another company–the factoring company. Because so many businesses experience delays between issuing their invoices and receiving payments, factoring companies offer a way to stabilize cash flow. The factor will buy up your outstanding invoices at an agreeable price and collect the outstanding payments directly from your clients. These are the basics of factoring, information that you’ll need to know if you consider this an option for your business.
- Factoring is Not a Loan
Confusion and misinformation with regards to factoring leads many business owners to believe that this is some kind of loan; it is not. There is no lending involved at all in factoring. When a factor buys your invoices, the sale is final. Responsibility for collecting that payment rests solely with the factor, and you do not owe anything to anyone. Likewise, nothing is owed to you or your business. Always remember that you are neither giving nor receiving a loan. Factoring is a selling transaction, not an act of lending.
- Nothing in Business is Free
Naturally you must be asking yourself: what’s the catch? Of course, nothing in business is free. If a factor is buying up your outstanding invoices and going through the trouble of collecting from your clients, then they must be getting something for themselves. Factoring companies make their money by buying your invoices for less than face value. Factoring companies will typically pay you 75 percent of your invoice’s value up front, with the remainder to be paid once the invoice is filled, minus the factoring companies fees. In most cases, you’ll be losing 2 to 6 percent of any given invoice when you opt for factoring.
- Factoring Helps Read Your Financial Future
Small businesses everywhere are fraught with uncertainty when it comes to their finances, and factoring can help shed some light on these murky situations. Simply put, if a factor agrees to do business with you, then your future is looking brighter than you may think. No one goes into an unprofitable deal. Factors see money in your future when they buy your invoices, and they also see reliability in your clients. Factoring is a very good barometer for reading your business’s financial future.
- Opinions are Rapidly Changing
In the past, factoring companies were often viewed as bullies and tough guys in the business world, but that opinion is rapidly changing. Factoring is a perfectly legitimate business strategy and the reputable factoring company NR Business Credit is widely regarded as one of the best in the business. Don’t be afraid of the stigma attached to factoring; it comes from outdated thinking and business practices of the past. Factoring is a great way to stabilize your business’s cash flow during rough times.