Companies in a cash-flow crunch or that have slow-paying customers often sell their open invoices to a nonbank commercial finance company called a factor. Factoring provides companies with a flexible source of cash without having to wait 30, 60 or 90 days for payments from customers. A factoring company purchases the invoice and advances up to 95% of the invoice amount. Once the bill is paid, the factor remits the balance, minus a small fee.
Factoring is an extremely effective financial tool for receiving fast working capital, meeting payroll, purchasing equipment and fueling business growth. Instead of waiting 30, 60 or 90 days, companies choose to factor because it gives them immediate access to cash tied up in their receivables. After sending an invoice to a factoring company, a business can have the cash they need to operate their business, typically in under 48 hours.
Any time a business has a need for immediate cash, factoring is an excellent option. Invoice factoring is an effective business financing solutions for companies in a variety of circumstances. Often times, a company will explore factoring when traditional financing and lending is not an option. The following situations are common to companies that use factoring.
Smaller, startup companies choose to factor because factoring improves cash flow without having to go through a bank. Banks focus on a business’s creditworthiness when considering to make a loan; however, factors look at the financial soundness of a business’s customers. By doing so, factors give small firms with a weak credit history the opportunity to sell their invoices and get the cash they need. Factoring (accounts receivable finance) has a less vigorous underwriting process and a much quicker turnaround time compared to traditional bank financing.
Factoring is very common in the trucking and transportation industry, as both industries are used to slow, 30 to 90-day pay terms. Factoring (accounts receivable finance) is extremely common in many other industries such as manufacturing, wholesaling, staffing, telecommunications and more.
Growing companies rely on factoring as a sound financial tool that grows alongside their business. When a company outgrows its current bank line, even with a good relationship, a bank isn’t always able to extend loan amounts. Unlike traditional bank financing, factoring isn’t based on a loan. So, no debt is incurred on your balance sheet. As your business grows (and your invoices grow), your line also grows.
To find out how factoring can help grow your business, contact TCI Business Capital at 800-707-4845