Factoring companies are very beneficial for business owners; they help them get immediate liquidity so that they can continue running their business. There are various other benefits that factoring companies provide business owners with, and the internet has a lot of information related to that.
Here today, we will understand the working process of factoring companies.
It is one of the most popular financing solutions for business owners who have stringent budgets or slow-paying customers who keep money tied up.
What is factoring, and what is the process?
Factoring is the process of selling your invoices to factor companies, and they in return pay you the lump sum amount at once keeping a percentage of the money as the fee. These factor companies then gather the amount from the customers in the time mentioned in the deal. The accounts receivable act as collateral and you are not required to pay any additional security for collecting the money of your invoices.
There are three significant steps in the process of factoring that take place when you decide to go ahead with the process, which,in order,are as follows:
Application for invoices to cash: once you sell goods to customers, they do not necessarily pay right at the moment. Business deals require you to wait for the payments for a certain period of time. This time period varies from one company to another and can be anywhere from 30 days to 90 days. For this period, your money is tied up, and you will not be able to utilize your profits. This is where factor companies come into play. You take your accounts receivable to a factoring company and apply for factoring.
Verifying your customers:Upon receiving the invoice application, the factoring company will review your application and checks the creditworthiness of your customer. Focusing on whether your customer will be able to pay back the mentioned amount or not! Once they have done their part, the factoring company will file out their terms and conditions which will be sent to you for approval. Once you agree and the documentation takes place, your company then sends the factor invoices for goods or services that have been delivered. Once the verification process is done a large percentage of the total amount is wired into the account. The rest is followed upon receiving the full amount from the customer.
Full payment and fee: you do not have to worry about collecting the money from your customers as the factoring company will do it. Your customer now will be paid directly to the factoring company according to the agreement for the invoice payment. Once the full amount is collected from the customer, the factor pays back any left amount after deducting their fee from the total money received.
Based on the payments and the customer, the process can be repeated if everything checks out.
If you are looking for fast cash-flow for your business and do not want to wait for payments, this is one of the best options for business owners.