Factoring for Beginners

Even though it is one of the oldest forms of business financing, factoring can be confusing to newcomers who are used to credit lines and traditional loans. That is because technically speaking, the agreement you make with a factor is not a traditional financing agreement. You do not have to repay the money you receive, and you do get to discharge your invoices from your receivables ledger. That is because when you factor in your receivables, you sell them to the financing company, and then they assume both the risks and the rewards that come with collections.

Outsource Administration Time Spent on Collections

Working with a factor is an especially attractive solution for small companies with limited resources for administration. Instead of worrying about contacting clients to follow up on your invoices, you can simply sell unpaid invoices on a schedule and then move on with your business. As you work with a single financing provider over time, your cost of factoring tends to decline, especially if you work with that service provider to identify unprofitable clients and cut them loose.

Get Paid on Time Every Time

You cannot control whether your customers pay you on or before your invoice due date. Often, it’s within a reasonable amount of time after the date, and sometimes things slip through the cracks. You get to eliminate that uncertainty when you sell invoices, allowing you the luxury of a predictable budget without having to dip into your own reserve funds to balance the scales when payments are late or they are not due before outgoing expenses.

You can never control whether the invoice gets paid at the right time, but with factoring, you can control whether your own business gets paid at the right time. Factors have provided that service for centuries, back to when they would underwrite the financing for entire farms or merchant fleets for the Roman Empire.

Make It Your Full-Time Solution To Cash Management Challenges

If you work with the same factor regularly and work together to keep your customer list groomed, the cost of the service can be quite low. Compared to the labor time you offload it could even neutralize your expenses under some conditions. That’s only a perk, however. The real benefit is being able to count on cash influxes on specific dates and build budgets around those influxes with confidence. The better your relationship with a single service provider, the more consistent your estimates will be when it comes to the cost of factoring.

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