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Factoring: What Is It and When to Use It

Slow paying customers is a major reason business owners are held back from growing their companies. A recent survey found that if all late invoices were paid at once, business owners could hire 2.1 million employees and pay themselves $31,000 more! Another study found that 82% of business failures were caused by cash flow problems.

Business owners know that all their invoices are not going to be paid immediately and they will always have to cope with slow paying customers. There is a way to speed up your cash flow and to stop worrying about aged invoices. Factoring, or accounts receivable financing is selling your outstanding invoices for cash.

Say your coming up to the end of the month and your short of cash for payroll. You have several open invoices to your customers, but there’s no guarantee that they’ll pay in time for you to cover your payroll. You can sell your invoices to the factoring company and have plenty of cash for payroll.

What is Factoring?

Factoring is selling your receivables to a company that will advance you a percentage, usually 70% to 95%, of the invoice amount. A discount fee is charged that varies depending on the size of the transaction, and the risk that the factor is taking on. You will be paid more for a current invoice to a blue-chip customer versus a 90 day past due company with a poor credit history.

Factoring has been around since the ancient Egyptians and was prevalent in colonial America, helping to cargo ships. The effect to you the business owner is getting your money immediately instead of hoping to be paid on time.

Benefits of Factoring

The primary benefit to factoring is helping the business owner get cash quickly and reliably. Factoring is especially useful to businesses that have large invoices to customers that pay slow (such as large corporations or government agencies). In the meanwhile, the business has payroll and other bills to pay- causing negative cash flow. Factoring instantly causes cash to flow. Companies that have money tied up in inventory and equipment getting paid quickly is critical. Having factoring takes the worry out of the equation for business owners.

Is Factoring Right for Your Business?

Factoring companies can specialize in a particular industry, like staffing or government contracts. When looking for a factoring company check their website or ask if they handle companies in your industry. Consider your reasons for needing additional capital. Maybe your margins are too small or you invested in the wrong equipment. On the other hand, factoring may be well worth it by keeping your cash flow steady and predictable.

To learn more how invoice factoring can benefit your company, call Jack Stieber or Brad Gurney to keep your cash flow positive at 1-800-297-6652 or complete our quick application form.