Factoring companies may not have come up on your every-day radar before, but if you’re a business with some cashflow challenges, they could be the solution you’ve been looking for.
A factoring company is essentially a financing service, but they differ from other financing companies in that they don’t actually lend money. Instead, they will purchase outright any accounts receivable you have, that have not been paid in full by your client(s). Factoring exists mostly in industries where customers purchase goods & services and pay for these within a 30-to-60-day term. Often this leaves the goods & service provider out of pocket while they wait for invoices to be paid and can limit the business from future growth as they scramble to find cash assets.
The good news with factoring services is that you and your business get an immediate cash injection. The factoring company typically provides you with payment in 2 instalments: the first, known as ‘the advance’, goes straight to you and will generally be around 70 – 90% of the money owed by your customer. The second instalment, known as ‘the rebate’ comes to you once your customer has paid their invoice, in full, to the factoring company.
Unfortunately, nothing comes for free. You’ll receive your second payment covering the remaining percentage of the invoice not already paid, but then the factoring company takes their cut – the ‘financing fee’. This fee varies between industries and across companies but will typically sit within the range of 2-3%.
But don’t let that put you off! The gain of immediate cash flow to your business will more than likely offset any fees incurred.