Factoring is an alternative financing option for businesses that do not want, or cannot get, a traditional bank loan. There are a few different types of factoring available, depending on the size and experience of the factoring company. Large companies can offer a varying factoring directory from which businesses can choose. Accounts receivable, purchase order, invoice, and government contract factoring are all ways for businesses to improve cash flow, meet immediate expenses, and continue to compete within their industries. The application process is easy, and cash can be available in a day or two after approval.
Factoring allows businesses to be paid for work completed sooner than the thirty to ninety day delay in payment through the invoice process. The company is a lender that pays out up to ninety percent of the value of the invoice up front. The business surrenders the invoices for the company to collect in full. The business has cash fast, and the lender receives the remainder of the balance as a fee. There is no additional interest rate to pay, like there is with a bank loan. Factoring can be done as a one-time transaction, or on an ongoing basis, depending on the preferences and needs of both parties. Owners need to keep in mind that one-time factoring will cost more than an ongoing arrangement.
When seeking a factoring company, business owners will want to compare rates, conditions, and qualifications. Larger lenders will pay a higher amount on invoices or contracts, while smaller lenders tend to pay less. That means the business may get between eighty to eighty-five percent of the face value of the invoice. Conditions may include recourse or non-recourse factoring. Non-recourse factoring means the lender assumes all the risk if an invoice is not paid by the customer. Recourse conditions means the risk is split. If the customer does not pay the invoice, it is sent back to the business for collection purposes. It is wise to find out what the qualifications are for factoring before applying. Some lenders require an average monthly invoice income of at least ten-thousand dollars, while others will factor lower incomes, such as one-thousand dollars per month.