What Is Factoring?
Simply put, factoring is selling your accounts receivable to a third party at a discount. Factoring is also known as accounts receivable financing or a/r financing.
A good example of factoring can be found when doing business with Capital Now Inc. You sell Capital Now one of your invoices. They will give you up to 75% of the invoice’s face value. You get the remaining 25%, minus the fee, once your client has paid off the amount they owe.
Factoring has an assortment of benefits for any business that decides to use these services.
1) You will have greater control over your company’s finances and operational costs. You only sell the invoices you want to give. You only need to do sell your invoice when you need the cash. You decide when to submit the paperwork.
2) Factoring is a way for companies to recover from a business slump and rebuild credit. Companies like Capital Now will approve your request based on your customer’s credit history, not yours. You get to rebuild your business credit by paying down your debt and maintaining your business expenses.
3) You get more purchasing power from your suppliers. You do not need to buy supplies in short spurts. You can buy what you need in bulk at a discount. You have the power to get early-pay discounts. Early-pay discounts allow you to pay off everything before the due date. You get your supplies and your business cash flow increases.
4) You have the advantage of getting better contracts when you do business. You grow your business by getting more clients. You get the supplies you need without a waiting period. You normally need to wait until your invoices are paid.
You eliminate this step by factoring.
5) Every business needs extra support to help their growth. You get this support with factoring. You get access to managers who can help you make more informed business decisions. You can use the extra funding to help solve your cash flow problems.
You Get Paid When We Get Paid: Five Ways To Avoid This Trap
1) You need to set up an agreement. Factoring is a way to get some needed cash into your business, but you still need an agreement. Clients who do not sign a contract with you are going to be less likely to pay back their debts. Some clients lack money. You still need to get paid. You should not let lack of money stop you from them paying you back.
2) You need to rethink the credit card idea. Your clients are smarter than you think. If your payment options include only a few options, they will use this as an excuse to not pay you. You need to consider every payment option out there. Your clients will not have any excuse once you do that.
3) You need to spell everything out in black and white. You need to set some boundaries. Boundaries work for the invoices you factor out and those you do not. You cannot rely on every client to be diligent with their payments. You need to tell them what is acceptable and what is not. You can also refuse any more transactions until they pay everything down. Boundaries like that will send out a clear and direct message to your clients who refuse to pay.
4) You need to enforce something called a sketch limit. Some clients will change their mind over and over. You have to be clear. You will charge them up to $100 once they reach a set limit. A sketch limit is a way to enforce your client’s needs.
5) You have to address the money right away. You have to start charging at least half upfront prior to the agreement. Perry decided to hire you to do some contract work. Perry pays you half of the money in advance. Perry changes his mind after 50 hours of work. You have to let Perry know he is not going to get his money back. Perry’s 50% is already billed into the a/r financing. Perry signed an agreement. Perry still owes you the other half once the work is done. Outlining boundaries like this is one way to ensure you are not being taken advantage.