Factoring receivables is a fast and reliable way for any business, of any size, to build up their cash flow. Factoring receivables works by selling outstanding invoices and accounts receivable to a third party, sometimes called a factor, at a discount that is negotiated between them. The third party or factor then collects on the monies owed from the clients who received the goods or services. You lose a portion of its receivable income, but it allows businesses, especially small or growing companies to get their money upfront, and quickly.
1. Get the money right away
Instead of having to wait at least 30 days, and sometimes up to 60 days before the customer or client pays their bill, they get their money right away. That’s the main benefit of the factoring receivables process because it frees up cash for the business and allows them to pay their own suppliers and invoices as well. But that’s not the only benefit of factoring receivables.
2. Benefits and advantages
There are many other benefits as well. For one thing, factoring receivables is not a loan, so it doesn’t impact a company’s credit standing with their bank or institution. There’s no interest, or anything to pay back. There is a small fee, but that comes out of the payment from the third party who handles all the money. Plus, a business doesn’t need an army of bill collectors to track down and recover their outstanding debts. That’s not their problem anymore. Factoring receivables is not based on the credit of the originating business, but on the credit of the people and companies owning them money.
3. Ideal for start-up companies
This type of accounts receivable arrangement is ideal for companies that are just starting out. Their cash and cash flow are tight and credit from the bank is like stretched to the limit. And they need that in-coming cash to hire, pay and train staff and for their early operating expenses.
Some large corporations like factoring receivables because it’s more cost-effective for them than to employ people to collect on their invoices. This means that there are very few industries or sectors who do not use factoring receivables financing. Every business, large and small, can use more ready cash that comes from factoring receivables to pay the costs of operating and growing a company.
4. Differences from a bank loan
As noted above, the factoring receivables is not technically a loan since there is no requirement to pay any money back and there is no interest charged. There is a front-end fee, but that is simply the service costs for carrying out business in this way. If a business, especially a new one, applies for a bank loan there is no guarantee or success, and there will be conditions attached to that bank loan. That would likely include having to put up a guarantee or collateral before the bank or financial institution would agree to the loan in the first place. But if a business could do that, they wouldn’t need a loan from the bank because they’d already have the cash.
5. Bank charges and interests
There’s also the bank charges and interest which are significantly higher depending on the risk to the financial institution. They are much higher than the usual three percent fee that factoring receivables companies would charge, that’s for sure. Those interest and principal loan payments are hard to make for any business and sometimes they struggle with the debt load that they create.
Factoring receivables, on the other hand, does not take anything away, and leaves the business with all its credit and cash flow intact. These types of arrangements can be set up in days, sometimes hours. That means a business can sign up for factoring receivables today and receive cash in their bank account tomorrow. It is fast and effective and works much better than taking out another bank loan.