How To Know If Factoring Receivables Is Right For You
Factoring receivables is when a business sells its invoices to another company who will then collect on them. While it may seem complex, it really isn’t. Basically, as a business owner, what you are doing is selling the invoices that you haven’t collected on so you can get the money now instead of waiting for the customer to pay. As you might imagine, this has many benefits, especially if you are running a business where you are not collecting on invoices for 30 or more days.
The terms of this business transaction may vary. Generally, though, a company will advance you a percentage of the amount of your invoices within 24 hours. Once the invoice is paid in full, you will get the remaining balance. The company will charge you a fee for their services, which is taken out of the balance.
One of the main benefits to this type of transaction is that it isn’t a loan. You aren’t borrowing money. You are simply getting a cash advance on money that is owed to you. You are assuming no risk or debt. Unlike loans, you aren’t racking up fees either. You have the one fee to pay the company in return for their services, and even that comes out of the money owed to you by your customer. So, if you are worried about taking on debt yet need money now, then this would be a good option for you.
Generally, factoring receivables is a good idea for a business that has reliable customers. If the majority of your customers pay their invoices on time, then this would work for you. You can still do it if you have trouble with customers paying, but you may not see a large cash advance up front since factoring companies do look at the customer’s credit history when figuring that initial advance percentage.
If you are just starting out and don’t have a lot of cash on hand, you may struggle with making it month to month while you wait for customers to pay their invoices. If this is your situation, then factoring receivables can be a good option because you can get the cash flowing instead of sitting around and waiting for it to come in.
Invoicing customers is common in the business world. Companies want to give customers the option to buy now and pay later. It creates good business relationships. However, it can be difficult for the business owner if he or she needs money now and not 30 or more days from now. That is when factoring receivables comes in and helps out by getting you the money you need when you need it.