Factoring: A Crash Course for Small Business Owners
Most small businesses at some point need additional financing to maintain cash flow or fuel growth. This is especially true of companies that offer long payment terms to their clients. While waiting for their customers to pay, they still must meet their obligations such as salaries, rent, supplies, inventory, and other expenses. One type of funding that works well for many businesses is factoring, also known as accounts receivable financing.
Factoring involves selling your accounts receivables to a finance company in exchange for the working capital you need for your business. Once your invoices are approved by the factoring company, it advances a first installment of 75 to 80 percent of their value, depending on the age of the invoices and the creditworthiness of your clients. After your customers pay their bills, you receive the remaining 20 to 25 percent of the payment, minus a factoring fee.
Benefits of Factoring
If your clients habitually take advantage of long payment terms, accounts receivable financing offers you a quick source of funds to stabilize your cash flow. You can sometimes obtain the finances you need within a few days. Unlike traditional business loans, factoring does not involve collateral, so you do not need to risk losing property, vehicles, or inventory to secure financing. Some business owners raise funds by selling equity in their businesses, but with accounts receivable financing, you retain full control of your company. Factoring also gives you more time to focus on business growth, as the financing company that buys your accounts receivables generally takes over collection of tardy customer payments.
Versatility of Factoring
Factoring provides you with the working capital you need to make timely payments on your bills. You can also use the funds to grow your business by purchasing inventory, obtaining needed equipment, improving your marketing, hiring new employees, or branching out to more locations.
For more advice on factoring and other small business financing solutions, contact AMZA Capital.