Ensuring a steady, reliable cash flow can be a challenge for most business owners. With customers making late payments and sometimes having to wait up to 90 days to pay, managing your company’s finances can be a real headache. This is the reason why so many establishments opt to go down the factoring route. Regardless if you’re a new or established business, factoring can be a funding solution for you. We’ve answered some of the most frequently asked questions about factoring.
What Is Factoring In Finance?
The process of factoring is quite simple. You work with a factoring company and sell them your invoices. The factoring company then advances you the majority of the total invoice. That money is immediately available for you to use. The factoring company will then collect the outstanding invoice from your clients. Once the full amount has been successfully collected, the factoring company will then pay you the remaining amount, minus a small factoring fee. That means fast cash and fewer worries.
Why Is Factoring Better Than A Bank Loan?
Invoice factoring provides a flexible and convenient alternative to traditional bank loan or other lending institutions and features a number of important differences:
- First, you do not incur debt – you are simply receiving an advance on work that you have already completed. You are not projecting that you will earn some unknown amount in the future, and you are not promising that you will pay back the loan, with interest, with those projected earnings.
- Second, in most cases, you will be approved more quickly for your first funding from factoring companies. With factoring, you have no limit on how much financing you can receive as the factoring process is based on your outstanding accounts receivable, not your net worth or credit score. Also, because factoring companies evaluate your customers’ creditworthiness rather than your own, you can be approved right away for advances regardless of your own business background, credit score or collateral.
Now that you have the answer to the question of how factoring is different from a bank loan, you are probably in search of factoring companies in your area. If you’re based in the United States, our Factoring Company Guide can help you find a factoring solution to suit your needs.