Factoring companies may also be referred to as debt factoring or invoice factoring companies. This financial product enables businesses to sell unpaid invoices to a third-party company; in this case, called a factor. Denver factoring companies buy invoices for a percentage of their total value and take over the responsibility of collecting the payments directly from the customers. This type of alternative finance has grown in popularity since it has become more challenging for businesses with imperfect credit to use traditional finance products.
How exactly do factoring companies work?
Most factoring companies pay in two installments. The first one covers the bulk of the receivables, and the second one is produced when the customers have settled their invoices. Here are the necessary steps:
Step 1: The business submits details of its invoice to the factor. The invoice factoring company then has to determine if the business is eligible for the factoring services. The company assesses how risky they feel the loan depends on the industry and the customers’ financial situation. They will then give a quotation.
Step 2: Once an agreement is reached, the factor will advance the business the money
Step 3: The factor them starts collection of the invoice with the customers
Step 4: After the invoice has been collected, the factor pays the business the remaining balance, minus the fee.
Why do businesses use factoring companies?
The main reason why businesses opt to work with factoring companies is due to speedy access to funds. The process speeds up access to incoming cash flow, as receiving payment for invoices can sometimes be a lengthy process.
Usually, the payment terms for invoices can range anywhere between 30 days to 120 days. This can lead to problems with cash flow. Either bank overdrafts or business loans can fill the gap. Unfortunately, this option may not be available for businesses that have less than perfect credit. This is where alternative finance comes in. invoice factoring offers a useful solution in such situations.
What are the pros of working with a factoring company?
- A fast and secure source of cash flow that releases working capital that’s tied up in unpaid invoices
- Less time is spent chasing the late payments since the factor assumes responsibility for collecting the debt and take over the management of your debt control
- As opposed to debt collectors, factoring companies are more professional. They send gentle reminders to improve the customer’s and client’s payment times on a long-term basis
- It’s a less expensive option as compared to equity investors
What are the benefits of working with a factoring company?
- It could potentially affect customer relationships since a third party gets involved in collecting the invoices
- Businesses lose some element of control after handing over responsibility to a third party for accounts receivable.
- The costs are higher than bank loans. So this type of financing works best for businesses that have a high-profit margin
Factoring is designed to help provide working capital for businesses that tend to experience longer payment terms with invoices. After eligibility has been established, the factoring company goes ahead to purchase the unpaid invoices for a percentage of its value and then take over the debt-collection process. Essentially, factoring companies provide the much-needed working capital where invoices are taking lengthy periods to get paid.