Home Finance Factoring: Beginners Guide

Factoring: Beginners Guide

Running a successful business is no easy task; you have to be great at managing time, money and other resources and all this while having time for yourself. One of the crucial elements of any business is having steady cashflow and not having your money caught up in payments. For this, many business owners look up to factoring companies that can help them navigate through this challenge.

What is factoring

Factoring is a process that allows you to generate cash flow by selling your accounts payable to a factoring company that provides you with the liquidity as per the invoices and collects the payment from the client. Well, there are some pretty straightforward answers to this question.But a simpler way to look at it is if you have a small business and have payments pending from business customers and can’t have your money tied up for a fixed time then factoring is a good idea for your business. Factoring allows you to sell your outstanding invoices and get the money that you are owed, the company that you sell your invoices to collect the payment from the customer who was supposed to pay you. There is a fee involves in the process that varies in different companies.

Some benefits.

There are several benefits of factoring that will come in handy in times of need, and these are also some smart options taken by businessmen to grow their business. The immediate cash flow that is provided to you is the most prominent reason why anyone would go to a factoring company as the liquidity gives you the freedom from having your capital tied up restricting you from continuous growth. You wouldn’t have to wait for your customers to pay up and can continue business as is with the immediate cashflows from the factoring companies.

The other advantage is that you do not need to furnish any sort of collateral as the invoices act as the collateral that the factoring company takes from you. You do not have to think twice before putting up any primary resource as collateral as there is no need to.

There is always the other side of the coin, with the benefits of factoring; there are also various things that one needs to keep in mind before such a decision is taken.

The fee is something one might not be prepared to pay as they are already a small business and do not make many profits. Factor companies usually charge anywhere from 1 to 5 percent for the tradeoff. It might be better off for your business to wait for your customers to pay up as these fees can be additional costs that might make the budget tighter than it already is.

Your invoices have information about your business that you might not be prepared to share. If you are not sure about the practices or the reputation of the company, it is better to not jeopardize your business by handing over such information. Make sure that you are comfortable and trust the company before proceeding with the tradeoff as once the invoices are handed over you give them complete control over it.

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