How factoring saves businesses

How factoring saves businesses

How factoring saves businesses

Factoring saves businesses by alleviating cash flow problems. Being your own boss is great until cash-flow problems threaten the survival of your business. A recent study by the U.S bank attributes the failure of 82%  of small businesses and startups to cash flow problems. So how do you know if you have a cash flow problem? If your expenses exceed your cash – you have a cash flow problem.

How factoring saves businesses

This is where a reputable factoring company can save your business. If you don’t have enough cash in your business to cover all your bills while you are waiting for your clients and/or customers to pay outstanding invoices, a factoring company can help you meet that challenge. Whilst there some pros and cons to invoice factoring, one has to consider all their options when trying to keep a business afloat during tough times.

How it works

A company that is not able to wait until their clients pay invoices sells these outstanding invoices to a third-party collector or factoring company at a discount. Here is how it works: Perhaps you have outstanding invoices of $10 000. You hand these  outstanding invoices over to a factoring company that charges you a fee of 10% ($1000). The factoring company will now immediately pay you 80 – 85% of that invoice less than their 10% fee ($1000). So you get the cash due on your invoices immediately to cover your business expenses  – but you just get less of it. 

Additional factors

  • Look out for weekly fees that your factoring company might charge you. These fees are charged at very little, usually just 1%, for each week that the invoice remains unpaid. 
  • The factoring fee is set out by the factoring company and is dependant on a couple of things:
  1. Higher invoice rates will have higher fees and vice versa
  2. The customer’s credit record will affect the factoring fee
  3. Your sales volume (helps determine the risk)
  • They are two types of agreements that you can enter into that ultimately affect the factoring fee as well. You can choose a recourse or non-recourse agreement for your invoice factoring. A non-recourse agreement warrants a higher factoring fee as the factoring company takes the risk of non-payment by your customer. An agreement with recourse means that ultimately you take responsibility if your client does not pay.

For more information on how a reputable factoring company can help you successfully keep your business afloat, despite cash flow problems, get in touch with us today.

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