A company that relies solely on cash flow from customers will soon face issues when business expenses are piling up. Factoring, though not a business loan strategy, is an invoicing process that you can use to receive immediate payment for your services. Learn how you can use factoring to your advantage to better manage your business’ finances.
How to Use Factoring for Your Business
Alternative Financial Solution
To avoid taking a business loan, many small to medium companies choose factoring to acquire the cash flow needed to run their business. This provides an advantage for business owners who have slow paying customers or those who need immediate income to fund the other aspects of the business, such as purchasing inventory or paying employees. Factoring improves certain processes of your business.
Before using factoring, it’s important that a business is in good financial standing. In factoring, a business sells its invoices to a factoring company which provides an immediate lump sum of cash to the owner, usually between 70 to 80 percent of the invoice amount. This amount is based on creditworthiness, similar to a business loan. Then a transaction fee, or “discount rate,” for the service is charged, which can be anywhere from one to five percent, depending on the factoring company. When the company collects money from the customers, they will forward you the rest of the invoice amount.
Benefits and Costs
Factoring offers fast cash flow and has an easier approval process than applying for a business loan from a bank. It’s ideal for business owners who would rather accept a fee rather than apply for a secured loan from a bank, which requires collateral in cases of default. However, if your original customers don’t pay the factoring company, you may have to re-purchase the rest of invoices and risk a higher transaction fee for the service. Factoring invoices might not be wise for businesses with smaller invoices to offset the cost of the discount rate.
Whether you’re a startup or a business looking to improve its financial strategy, traditional credit loans won’t do. K-WAM Financial Solutions in Jacksonville, FL is an innovative, business solutions company that helps small and medium-sized companies receive the financing they need through asset-based lending options. Their other services include home improvement financing, mergers, construction loans, equipment leasing, accounts receivable, and payroll. Call them at (904) 220-2567 or visit their website for more information on their services.