Factoring is a financial process that works best (most efficiently) if your business has a lot of outstanding invoices. The delay between the rendering of a service and payment can cause some serious cash flow problems for your company – especially in times of customer growth; invoice factoring can help significantly assuage these difficulties.
The Mechanism of Invoice Factoring
Basically, you contract with a company that specializes in factoring receivables, and for a finance/administration fee, they will effectively speed up the time frame over which you get paid for the items or services you provided. This is accomplished by sending you an advance of around 75% of the total value of your outstanding invoices; thereafter, the factoring company is responsible for collecting the payments from your customers. Once this is done, they will send you the remaining 25% of the invoices.
It’s clear from the numbers involved that the more invoices you have out there, the more effective the factoring mechanism. The factoring company can afford to wait the full 30, 60, 90 or even 120 days until your clients can make good on their payments; whereas you receive the bulk of the money relatively quickly, which improves your cash flow and the working capital for business operations. Remember – you receive the remaining 25% only after your client finally remits payment to the factoring company; it is only then that said company also extracts their finance fee.
The first step is determining whether or not you meet the requirements set out by the average factoring company. First of all, your outstanding invoices have to be from government or commercial clients with a reputation for following through on payments. The medical industry, for example, is known for having reliable but slow-paying customers, so this would qualify; similarly for suppliers that have been in business for a while. Secondly, these customers must not have any lien actions against them.
There are several types of factoring; contact us to speak with an expert that can fill you in on the differences between full recourse and non-recourse, and how it relates to your particular business.
Contact Hornet Capital Solutions to learn more about how factoring can improve your cash flow.