This method is a form of funding wherein it is especially tailored to assist firms with working capital or cash flow issues due to having clients who settle their payments on a later period. In addition, this is often deemed as one great solution to consider when business owners seriously require large sum of money to enable their business keep going and fund other invoices. Essentially, it is known for being quite advantageous in terms of improving the working capital of your company or small enterprise.
This works best for businesses that have clients who usually settle their invoices in a month, two months or three-month period. For most businesses that do not have much capital in case situations like this happen, it is a must to search for alternatives that can provide them funding assistance at once. There is no sense in waiting for your customers to settle their payments to you first since this would only make your business suffer in the long run. Undeniably, offering terms could create cash flow issues since a number of small and medium-sized firms cannot afford to wait for a longer period of time for settling payments. Further, they require finance to settle current expenditures such as vendors and salary of staff.
How can working capital and cash flow issue be resolved?
Through factoring, business owners can get by with their present expenses. This approach offers advance on your invoices from commercial clients who are termed as “slow-paying.” In other words, you obtain fast working capital which you can use to settle payments for other valuable expenditures.
How does this funding approach work for various types of businesses?
Many factoring firms structure their transactions as the sale of a property or asset. Fundamentally, you’re selling the fiscal rights to your invoices so that you can obtain instant payment. Moreover, factors purchase your invoice in 2 installments which consist of the rebate and the advance.
It is significant to understand that the advance covers up to nearly eighty percent of the invoice and this is then deposited right away to your bank account. Be reminded that the advance differs by firm or by industry.
At the time your client settles the payments, the factor deducts the second installment to cover the twenty percent remaining- this is less any fees. It is worth mentioning that this payment pays the transactions for the particular invoice. Note that each factoring firm carries out its own criteria so be sure to learn more about this prior the negotiation process.