In 2016, it was estimated that small businesses had around $825 billion worth of unpaid invoices. As this number continues to grow, it’s no wonder that most small businesses fail.
Invoices can add up and leave businesses in major debt. To avoid struggling to pay for necessary business costs, hire a factoring company.
What is a factoring company exactly? Read on to find out.
What Is a Factoring Company?
So, what is a factoring company? A factory company provides invoice factoring for businesses.
Through this process, they can put cash into accounts by selling the invoices they have to third parties. For the unpaid invoices that they have, a company will receive immediate cash instead of waiting for customers to pay.
This is a great funding mechanism for businesses that need immediate cash to pay their bills or make a significant purchase.
An invoice factoring company should never be used for the long term. Factoring can get expensive as the fees add up when customers take longer than 30 days to pay their invoices.
Working With Factoring Companies
If you are considering working with factoring companies, the price is probably at the top of your mind. These businesses will generally charge your organization a factor fee.
It is important to note that this fee is likely to grow week by week.
Knowing when to use invoice factoring is key to keeping your business from going into debt. A business that needs cash for payroll or inventory purposes should use this method if they have invoices due in less than 90 days.
However, you should only use invoices from customers who have good credit. These invoices will turn into immediate cash and once your customers pay their invoices, you can benefit.
Invoice Financing vs. Factoring
Both invoice factoring and invoice financing will provide businesses with the cash they need to accomplish their goals. In general, this is what most businesses use these services for:
- Making payroll
- Paying vendors
- Buying more inventory
Yet, they differ in one major way. Invoice factoring is a sales transaction while invoice financing works like a loan. Those that use invoice financing will get a loan from a bank based on the outstanding invoices they have.
Like any other loan, you’ll need to make payments to the bank while collecting payments from clients as you normally would.
In contrast, invoice factoring involves selling invoices for immediate cash. The business funding company you hire will own those invoices and collect payments from your customers instead.
Can Your Business Benefit From Hiring a Factoring Company?
After answering the question, “what is a factoring company?”, you can figure out if your business will benefit from one. In general, an organization in need of immediate cash will have the most advantages.
It is not recommended for companies with good credit and a low debt to income ratio to hire a factoring company.
Find the right factoring company for you by searching their credit score eligibility, maximum funding limits, repayment terms, factor fess, and so on. For more articles that discuss business advice, check out the other posts on our blog.
