Types of Funding: Factoring Companies, How, Why, and When to Use or Not Use Them!

 Factoring is a type of transaction where businesses sell their unpaid invoices to factoring companies at a discount. Factoring companies offer financing assistance to small-medium scale businesses that have unpaid invoices, they usually pay the amount immediately, and then they collect the money from customers directly.

In this blog post, let's dig deeper to learn more about factoring companies – why and when you need them!

How Do Factoring Companies Work?

A factoring company offers invoice factoring i.e. purchasing companies' unpaid invoices at a discount.

The business gets 85% of the invoice within a few days, while the factoring company takes the invoice ownership and the payment process. Furthermore, when the client clears the invoice payment to the factoring company the business receives the rest of the amount owed (15%) minus the fee of the factoring company. 

Moreover, business owners often choose factoring services when they need to cover expenses such as payroll, purchasing new supplies, and other miscellaneous expenditures. Factoring works like this:

• Your company offers goods and services to the customers 
• Invoicing for those goods and services is done to the customer in the normal way
• The raised invoice is "sell" to the factoring company. 
• The factoring company pays the invoiced amount immediately to your company, typically 80-90% of the invoice value, after validating the invoices.
• Customers pay the amount to the factoring company directly.
• Now, the factoring company pays you the remaining amount of the invoice minus their fee.

Types of Factoring Services

Generally, there are two types of factoring, recourse and non-recourse factoring.

Recourse:

In this type of factoring, the business owner accepts the risk in case the customer refuses to pay the amount to the factor. 

Non-Recourse:

In this type of factoring, the factoring company takes the risk of non-payment. In case the customer refuses to pay, the business owner is not liable to repay the amount to the factor. Additionally, in non-recourse, the fee tends to be higher as the risk is higher. 

Why Should Your Business Opt for Factoring Services?

Longer Payment Term

In your client’s clear invoices in the longer term (a month or more) then opting for factoring can be a best-fitted option. Choosing factoring services means flexible payments i.e. permitting clients a little leeway as well as allowing businesses to get quick access to cash.

Quick Cash Flow

If your business needs quick working capital for seamless business operations, and waiting for customers to pay their invoices is hindering business operation, an invoicing company can help you out!

No Collateral

Getting a traditional loan can be quite challenging for businesses with minimal collateral. However, if your credit score is good most factoring companies don’t need collateral, they approve the funds quickly.

No Liability

Invoice factoring isn’t a loan on the business, it doesn’t create liability. 

Factors to Consider Before Working with A Factoring Company

With so many options available, it can be a daunting task to find the right factoring company.  If you are new to the factoring financing option, there are a few imperative things you must know before considering factoring, as some factoring companies include additional charges, experience in a particular domain, flexibility, etc.

Fees

Pay close attention to the factoring company fees, advance rate, any reserve requirement, application fees, etc. Thoroughly read your proposal!

Exceptional Customer Services

Polite, courteous, and prompt email, chat, and telephone support is a must for any factoring company. Since they are dealing with your customers, you must ensure the services they offer align with your company's manner. Searching customer reviews and references can significantly help you gauge the factoring company.

Expertise and Experience

When working with factoring companies it's perfect to choose the one that has direct experience in your industry. The invoicing factoring process is standard but some industries may have different services and programs. 

Cheaper Than Bank Loan

Factoring is cheaper than a bank loan. The procedure to obtain funding is flexible and easier. The hassle of debt management is also taken by the factoring company.

If factoring is a good option for your business but you don't know where to start, hiring an experienced consultant would be a great option.  The right consultant understands your business requirements and can help you make the right financing decision. 

When Your Business Should Choose Factoring?

Your business should consider factoring when you have quite a few outstanding invoices and cash flow is not smooth. With factoring companies, outstanding invoices are handed over to a third party.

No matter if you are a small business or a multinational company, the key to growth is quick capital. With factoring, the overhead of accounts receivable is reduced Therefore, factoring is a cost-effective option for accessing capital and growing your business. 

Is Factoring Right for Your Business?

Compared to traditional financing options, factoring can be the best-suited option for companies looking to reduce the accounts receivable overhead and quick capital for growth. 

Conclusion

Factoring is a scalable and viable option for a business that needs quick capital to invest in new opportunities, purchase new inventory, payroll, reduce accounts receivable costs, and more.

If you are searching for the right factoring company, Black Swan Consulting can help! Black Swan Consulting is a pioneer consulting firm that can help you find the best factoring company. We work with hand-selected factors with years of experience in funding businesses like yours! If your business was declined funding by a traditional financial institution or if you need quick capital access, get in touch with us today!