If the extent of your knowledge about factoring is the mathematical process you knew in third grade but have long since forgotten, then listen up—it could help your business in a big way.
Factoring is the process of selling one’s receivables to a factoring company. The way it works is that a business applies for factoring, and if their clients are creditworthy then a factor will buy the unpaid invoices for 80-90% of their value. They then would give the rest back, minus a fee, after the billed customers have paid their invoices in full.
Factoring is fast, easy, and doesn’t negatively affect your balance sheet. It’s a great alternative financing option for businesses with certain characteristics:
- Companies looking to grow
- Companies facing a cash flow squeeze
- Companies with chronic slow paying customers
- All of the above
There are general firms and niche firms for every sort of business, and it is much easier to apply and get approved for factoring than for a bank loan.
So why don’t more businesses factor their invoices? Probably because most people don’t even know what it is! However, alternative financing is becoming more and more popular as bank loans become harder to come by.