Factoring allows businesses to see instant money from their customers, rather than waiting the normal receivables timeframe. A company that is seeking immediate capital will sometimes sell its invoices at a discounted rate in order to receive capital at an expedited rate. A finance company that purchases these invoices, also known as a factor, will pay the company the amount on the invoice after it deducts a small fixed percentage of the total.
Many companies do not use factoring when they are in need of capital until they have no options left. This is a habit that needs to be broken, because factoring should not be viewed as a last resort.
Companies that are growing at a fast rate should use factoring not as a last resort, but as a first priority. In order to keep a company growing at an accelerated pace, the company must have a lot of working capital at its disposal. Factoring is a way of gaining this working capital instantly, without the fear of debt, while also only paying a small expense to the factor. If Fortune 500 companies use factoring in order to keep working capital readily available, then shouldn’t you?
A lot of companies are worried about the high price of factoring. Many see factoring almost as an interest rate that will eventually be too expensive to afford. These assumptions are completely incorrect, and they lead people away from factoring as a common practice. It is better to see factoring as a percentage fee based on the total amount of the invoice that is sold.
For example, $1 million invoice could be sold to a factor with a transactional fee of 4 percent. The company selling the invoice will receive $960,000, while the factor would receive a fee of $40,000. It’s a very straightforward and simple way to get money right this instant.
Obtaining a bank loan with interest rates could put you at risk of going into debt, being forced to turn down future business due to the lack of working capital in your company. Choosing factoring could possibly save your company; it provides you with working capital that’s readily available for whatever comes at your business next. Don’t make factoring a last resort, make it your first decision.