A company might sell some of its products or services on credit to customers. But there comes a time when the company needs readily available cash and this is when factoring can be considered an option.
Factoring finance companies buys off your factor or receivables and instead pays you off the amount minus any fee or interest.
So when should a company think about factoring?
- Cash cannot keep up with the demand? Business is picking up and now there are cash flows gaps in the statement.
- Tired of waiting? A credit sale is for 30, 60 or 90 day. A business might be tired of waiting and hence a factoring company can take the waiting out of the equation.
- You want to grow – right now? Factoring is unlike a bank loan, there is no cap on how much you can factor if you have enough credit sales. And there is no interest to pay off at the end of the day.
- You are a new company? A factoring company rates your receivable on the basis of customer’s credit history. Not yours. This makes it easier to get invoices factored. Compared to a bank loan that requires a solid history for a riskier venture.
- Stronger customers required? A factoring company has access to a customer’s credit history. By using that one can evaluate who to sell on credit to in the first place. Criteria could range from ability to pay off quickly to how much of the credit is paid off usually.
If you know the answers to the above then you are the best judge to decide if factoring is the way to go or not.