How Debt Factoring Can Unlock Instant Cash For Your Growing Business

Debt Factoring can be a valuable financial tool for many businesses, providing capital when needed, without the financing showing up on the balance sheet.

How it works

Invoices for services rendered are sent to the factoring company rather than the customer. The factor then pays an immediate cash advance, collects the debt owning on your behalf, and pay it to you, minus their fee. Factoring is an age old practice and they range from one-man bands to large listed companies. It covers all industries and there is no limit to the amount of financing available, unlike a conventional loan. This is because the credit is based on sales and your customer’s payment ability, not the credit history of your business.

Finding a factor

Most factors specialize in certain business sectors so it is best to look for one that has experience in yours. It is important to meet with them, not least as they will be dealing with your customers and may be seen as an extension of your business. Ask questions, ask for references from existing customers and researching on line reviews.

Other advantages

Factoring can be particularly good for start ups that need immediate cash flow and those that don’t want to have to wait 30 or 60 days for payment. Immediate cash advances are usually made within 2 to 5 days for 70 to 90 per cent of the invoice value. It can take less than 5 days to set up an account and some factors also provide credit reports on existing and potential customers.

Downside

It can be more expensive than other financing options, and may work better where you don’t need to build strong customer relationships. But it can also be a perfect working capital solution, with no collateral required other than accounts receivable. One very important factor to look out for is the default provisions. Most factoring companies allow a grace period of about 12 months, but if they can’t collect the monies due from your customer by then, the outstanding sums will become immediately payable by you.

Fees

Fees vary from company to company are usually between 2 and 6% of the invoice total. Some charge a monthly fee based on volume, while others will have additional fees for money transfers, shipping and other costs. There are also like to be set up costs and make sure you are clear about the fees and renewal provisions, which are usually annual.