By Evan Vitale
When facing a cash-flow crunch and financing is tight, some companies will turn to “factoring” to help bring in money a little bit quicker and relieve some short-term stress. Factoring is also sometimes referred to as accounts receivable financing. Factoring is where a third-party purchases a business’ accounts receivables in order to receive cash quickly for outstanding receivables.
Here’s how factoring works:
- You perform a service or ship a product to your customer.
- An invoice is then generated and sent to your factoring company.
- The factoring company sends you a cash advance on said invoice.
- Full payment is collected by the factoring company.
- Once collected, the factoring company pays you the remaining invoice amount, less a fee.
Some businesses like factoring because they get their money quicker rather than waiting 30 or 60 days for customers to pay. In addition, some factors require less paperwork than banks and companies can usually receive cash within a couple of days.
Many factors are industry-specific such as medical, manufacturing, construction, trucking and staffing agencies, just to name a few.
However, the downside to factoring is the cost involved, which is usually several percentage points more than a conventional lender. In addition, your customers may not like dealing with a factoring company.
If cash-flow is tight and you are considering factoring your invoices, have a discussion with your accountant to see if there are any financial implications. Seek a few quotes from different factoring agencies for best rates and services.
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