Factoring refers to a type of financial transaction whereby a business sells its invoices to a factoring company at a discount. The factoring company advances up to 90% of the value of the invoices. San Francisco factoring companies provide financing options for businesses so that they don’t have to wait weeks before they get paid. Once the customer makes the payment upon the maturation of the invoice, the factor sends the remaining balance to the business.
Benefits of working with a factoring company
Is your business looking for a flexible way to raise money? Factoring is a cost-effective way in which people can get money to grow their businesses. The best part about factoring is that it allows your business to grow controlled by you rather than the customers.
Let’s take a deeper look at the benefits of working with a factoring company:
1. It’s not a loan
Many people think that factoring is a type of loan so they’re afraid that factoring their invoices translates to getting a bad credit score. One of the biggest hallmarks of factoring is that it isn’t a loan and so it doesn’t show up on the balance sheet as debt.
2. You get a guarantee
There is an underlying risk that customers will default on payments.
However, working with a reliable factoring company that offers non-recourse financing gives businesses the benefit of their financial resources, namely, credit protection. This guarantees payment in the chance of a buyer’s insolvency.
3. Improves liquidity
After assigning the receivables to a factoring company, the business receives financing in return. This helps regulate cash flow. Doing so increases the amount of working capital available and as a result, the business builds a balance sheet with more liquid assets and can grow faster.
4. Minimizes risks with credit investigation
To eliminate the degree of collection risk, many factoring companies offer credit investigation services where they collect enough data about the customer. With this reliable information, businesses can reduce risks when it comes to the collection and, therefore, curate a high-quality list of customers.
5. You save on time and extra costs
In the world of business and more so when running a business, time is of the essence. Businesses cannot afford to waste this precious resource on time-consuming processes like managing collections, monitoring credit, or evaluating a customer’s creditworthiness. Instead, they should spend time focusing on other business operations.
Working with a factoring company also allows businesses to spend less on overhead expenses as they handle collections and bookkeeping. Additionally, businesses can save money on unnecessary costs like penalties because they’ll make payments to suppliers on time.
Conclusion
The main reason why businesses factor their accounts receivable is so that they can meet cash flow needs to support the financial health of their operations. In addition to providing various financial solutions, factoring companies offer a collection and receivable management as well as credit protection. This clearly shows how businesses benefit from the reduced overhead costs, better credit terms, and invoice processing by a dedicated third-party.
