When small businesses are in financial turmoil, they may be forced to acquire financial help from banks through small business loans. They can alternatively seek capital to survive from factoring, which is gaining popularity by the day.
In this case, clients will buy goods or services from you on credit, which is saved on accounts receivable. A Wilmington factoring company pays you the invoiced amount then goes ahead to collect payment from the customers.
If your company can’t wait too long on invoices, you might consider factoring for several reasons. These could be:
- To repay a loan
- Cover up some short-term expenses
- Engage in other workable business
How Factoring Works
When you engage in factoring, you’re typically selling part of or all of your outstanding invoices to a factor to improve your revenue stability and cash flow.
Here is how it works:
- You sell goods or provide services to your clients.
- You invoice the clients depending on the services or goods received.
- You “sell” out the issued invoices to a Wilmington factoring company. The factor pays you about 80% of the total value upon verification of the invoices.
- Your clients will directly pay the factoring company.
- The company pays you the remaining 20% minus their fee after collecting the full debt.
Types of Factoring
Factoring allows your business to immediately receive the owed amount, while the factor follows up on the clients’ debt. There are two different types of factoring:
- Recourse factoring
The factor funds your company with about 80% of the total invoice value. The Wilmington factoring company will then pay you the remaining 20% after receiving funds from the client.
If the customer fails to pay the invoice within the stipulated time, your company pays back the 80% advance and fees and then follows up on the client’s original invoice.
- Non-recourse Factoring
It works more the same as the previous one, but with a slight difference. If the customer is legally unable to pay for the invoice, your company keeps the advance while the factor incurs the loss. This factoring plan guarantees your company at least 80% on every invoice issued.
Most factors prefer recourse factoring also to cover them from losses. When looking for a factor, be sure to ask about what plan they offer before deciding.
Benefits of Factoring
Getting an invoice cleared without having to follow up on it persistently has its share of advantages.
- Improved Revenue and Cash Flow
Debt factoring helps your company receive payment on invoices immediately after offering any service. It saves you the slack of chasing after clients to pay their invoices. This can help you exponentially plan on your business early enough and take up any new opportunities that may arise.
- Saves on Your Business Costs
Invoice factoring is believed to reduce business costs significantly. Well, apart from the fees associated with it, it is way cheaper than seeking the services of a credit control company.
It also reduces the stress of having to forceful demand for payment from customers.
- It is Cheaper than Loans
Bank loans often come with hefty interests, and what is more, it’s hard to secure them. It is easier to get debt factoring which is perfect for emergency financial needs. It can really save you a lot of headaches involved with applying for a bank loan.
- Promotes Business Development
Most businesses fail because of poor cash flow. If you lack the capital to put back in the business, the customers will run away due to a lack of goods and services. Factoring offers you good cash flow, which makes your business survive even through the most challenging times.
While factoring seems to be a good way to finance your business, it is important to note that it may work or fail with your company.
It needs a huge commitment, works well for companies with numerous clients, and might be too costly if it doesn’t work.
You may also spoil your relationship with clients. If the factor uses aggressive means to collect the funds, you may never see the customers again.
Conclusion
All said and done, accounts receivable factoring is one of the best ways you can use to receive short-term financing. A Wilmington factoring company will help you collect invoices on your behalf as you work towards your goals.
