What is Factoring?
September 4, 2017. Factoring is a form of financing which allows businesses to be paid for a product or service they have already provided to another company, but have not been paid for.
The major advantage of Factoring is that it allows businesses that often have to wait up to 30 – 60 days to accelerate payment to them. They can then use the cash flow for other revenue generating purposes as opposed to basically not having access to those funds for the entire length of time they are waiting on it.
Since most businesses business model generates significant revenue, cash is king. Cash on hand through factoring allows businesses to buy the next round of raw materials, inventory, have work in process, pay for finishing costs, pay staff or hire additional staff, pay for overtime, and deliver product. Processing the next round of product now using the cash sooner will mean they will be paid 30 – 60 days sooner for the next work in process.
Over the course of a year, this will speed up finished goods and in turn Gross receipts, by a multiple of 2 or 3. Factoring allows this speed up to occur. The cost of is often between 1% to 5%. If the cost to a business for is 3%, the additional revenues generated will typically far outweigh the cost of the financing.
How can I get Factoring?
How can I factor invoices?
Consider the following example. A business has received an order for a product for $100,000 on January 1st, and delivers on January 31st. The company paying normally waits 30 days to pay the funds. If they pay on February 28th, and this cycle occurs 6 times per year, that is $600,000 in Gross Receipts. The company providing the product cannot fully or totally complete work on the next product until they receive the money. If they factor the invoice and receive $97,000 immediately, they can begin work immediately on the next product. $97,000 x 12 = $1,164,000.
Gross revenues are $564,000 higher by financing the invoices. There are other variables that affect the math but the basic concept is sound. Gross receipts can be significantly increased by factoring because the money is available much sooner to turn around product.
Studies have shown that some companies are apprehensive to engage in factoring primarily because they do not want their clients, whom they consider to be their customers, to know they have requested this type of financing. This fear is almost entirely unjustified. If any party would not want to be presented with the issue, it should the company which essentially owes the bill.
This is the company that has received a product or service, or both, from another company, has been presented with an invoice for payment by the provider of the product or service, and instead of paying immediately, waits 30 – 60 days to pay on monies owed. This company will not be surprised by a request to factor.
The company waiting to get paid that may not want their client to be presented with a financing request by them should recognize that their customer likely currently engages in factoring for the invoices of other companies, is familiar with it and consider it a regular practice.
The company that is owed the funds, therefore, may be denying themselves significant working capital for no good reason. Often the request goes directly to the Accounting department and the owners of the business are scarcely aware that a client is setting up factoring. An excellent manner in which to arrange this is to simply have your Accountant call up the Accounting department of the company your business is waiting to get paid by. If the owner of the business that has been invoiced is involved, your business can simply say that in order to accelerate cash flow, your own Accountant recommended factoring.
Don’t keep waiting on the cash flow that belongs to you!. Start factoring today and start dramatically accelerating your company’s cash flow.
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