How Factoring Works

What’s the number one concern for businesses in today’s economy? Whilst some may argue that declining customer demand is a concern, many would agree that cash flow is an even bigger problem. After all, if there’s no cash coming in, there’s no cash going out to pay invoices, bills or salaries.

So, whilst decline in demand and declining revenues are difficult to deal with, not getting paid for those orders that are closed is an even bigger problem. With some customers taking up to 90 days or more to pay invoices, companies can often become overwhelmed with the lack of available funds. Business credit is even more difficult to secure given the current economic climate. So, what can businesses do?

Well, factoring is one incredibly popular option that many businesses in many industries, are starting to pursue. What is factoring and how does it help businesses?

Factoring is selling unpaid customer invoices for immediate cash:

Simply put, factoring is the process of taking those unpaid customer invoices and selling them to a factoring company. In return, the factoring company will provide immediate cash and then go about collecting on the invoice. Once the invoice has been paid, the factoring company will then provide the difference back to the company and deduct a fee for the transaction.

What is the fee for factoring and how is it determined?

When it comes to the fee the factoring company charges, it really depends upon a number of variables. Is your business operating in a high risk industry where customer credit is hard to come by? If that’s the case, the factoring company will take that into consideration and will likely charge a higher fee.

What’s the credit worthiness of the customer that owes on that invoice? That’s another variable to consider. At the end of the day, the fees associated with factoring must take into consideration the risk and amount of time it takes to collect on those invoices. After all, the factoring company will be providing cash up front and will therefore have to finance the time it takes to finally collect.

What types of factoring are there?

There are essentially two types of factoring. There is recourse factoring and non-recourse factoring. Recourse factoring is when your company assumes liability for those unpaid invoices. If the factoring company is never able to collect, your company is liable for the invoice’s value.

Non-recourse factoring is when your business doesn’t have any liability for unpaid invoices. In this case the factoring company assumes all risk. As such, the rate the factoring company pays your business will be higher for recourse than non-recourse.

Recourse represents less risk to the factoring company and therefore means a higher payout for your business. Non-recourse is more of a risk for the factoring company, and therefore your payout will be less.

When businesses are faced with a cash crunch, and need that fresh infusion of funds to make payments and keep the doors open, they often turn to the factoring option. These factoring businesses are professional, courteous and understand the stress and difficulties businesses face today.

With credit a constant concern, and the interest rates on business loans and lines of credit simply too much to absorb, factoring offers businesses a chance to access immediate cash.