September 4, 2017. – For immediate release. Factoring is a method of raising working capital used by many companies. Some business owners have questions regarding factoring and whether the advantages of factoring outweigh the disadvantages.
The major advantage is factoring provides working capital for businesses that would otherwise have to wait a significant amount of time to receive. Oftentimes, once a business has provided a product or service to another company, they have to wait 30 days or longer to obtain funding.
If a company has to wait 30 – 60 days to receive payment that is due to them, it inhibits cash flow they otherwise can use to begin work on the next project that will generate revenue. I can also prevent the company from soliciting new contracts, knowing they do not have the working capital to begin or complete the job.
The significance of factoring in this situation can have a major positive effect on a company. If a company completes a job in 1 month and has to wait 1 month to get paid, the total time is 2 months. They have to wait 30 days to start a new job and can only do 6 jobs per year off the use of those funds.
If they complete the job in a month, use factoring, and are paid immediately, they can do 12 similar jobs per month off that revenue. If the company can generate twice the revenue, the additional revenue will often far exceed the cost of the financing, even with a 3% cost of financing.
Some businesses are reluctant contact the customers that pay them and inform them that they are factoring the invoice. In many cases, the company being informed the invoice will be factored already has this arrangement with some of their other customers, is familiar with the practice, and is fine with the request. Additionally, there are further methods that are used to inform the company paying the invoice that it is being factored.
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