Extending credit is a great way to encourage sales. But while you wait for the customer’s payment, your inventory might drain, and your suppliers will come after you. Your employees expect paychecks at the same time every pay period. What will you do when cash is lacking due to extended credit?
1. Factoring Is Selling the Value of What Clients Owe You Before They Pay for It
Factoring has been around for more than six hundred years. It began in the Middle Ages to help merchants finance the growth of international trade. Today, it is still a fast and easy way to get working capital without the credit risks that banks and traditional lenders require.
As a business owner, your financing options are pretty much limited to banks and other financiers who are looking for a return on their investment. These institutions invest money in your business and wait for you to pay the principal and interest before they get the money back.
Factoring is when you sell what your clients owe you for a percentage of the value of their purchase. The credit risk is eliminated because you’re getting cash in hand before you deliver the goods.
2. Factoring Doesn’t Require a Long-Term Relationship
Factoring offers a business a fast and straightforward way to get cash without the loan commitment or hassle of business credit. It’s not a loan; it’s a sale. Most traditional lenders require you don’t have to go through the character verification and financial history check.
Factoring is also ideal for businesses with seasonal sales, such as construction firms, hotels, and retailers. These companies have seasons when they make a lot of money, followed by long slow sales periods.
3. Factoring Allows You to Expand Your Product Line Without Borrowing More Cash
With factoring, you can get more sales volume without increasing your borrowing. Lenders are only interested in your short-term cash flow, so they’ll only loan money for basic operations or projects.
Factoring allows you to build your business by taking bets on clients who need financing. Since financing comes from the cash advances buyers pay you, your business can use that money to finance new inventory.
4. Factoring Provides You With a Cash Advance When You Need It Most
The factoring process for a small business is relatively straightforward. You just fill out an application and send it along with the documents that verify your business credit.
If your credit is approved, you will usually get the money within 24 hours. After the application is approved, the company you are dealing with will purchase your accounts receivable for up to 95 percent of the value of the accounts.
The next step is to wait for your clients to make their payments, just as you would if you had extended credit to them. The factoring company will settle with you at the end of the month for the total value of the invoices.
Looking for business cash is just the beginning. You need to compare these different cash advances to get the best rates.
Factoring is not suitable for every company, but it can help businesses get out of a cash flow jam. If it’s not the right fit, you can always compare different loans or bank financing.
Porter Capital offers working capital solutions to businesses all over the country in a variety of industries. As a direct lender and factoring company, Porter Capital has provided over $6 billion in funding since its inception. If you want to learn more about invoice factoring, we can help. Get in touch with us today!