What is factoring?
If you rely on customers that make payments in the of 30 days, 50 days or 60 days period for your working capital, your cash flow is effectively tied up in those inovices. Although having slow paying clients is expected in today’s business environment, they do the managing cash flow a very difficult task. Paying suppliers, staff salaries and Office / Facotry rent becomes a challenge.
Factoring is the process of releasing cash from invoices as soon as they are issued, allowing you to put the money to work where it is needed most.
However, there is a way to solve this problem. The solution involves factoring your invoices.
Factoring is a financing tool that allows you to get your invoices paid by 2 days. It provides your company with the necessary capital to operate the business, to make the payements for suppliers and grow. However, factoring is not a business loan. Rather, factoring involves selling your invoices at a discount for immediate cash. The factoring company waits to get paid, while you get immediate use of the Cash.
Factoring can easily be integrated to any major types of business and works as follows:
1) You deliver goods or services and invoice for them
2) You sell the invoice to the factors. They give you the first installment of 70% to 90% of your invoice. This is called the advance.
3) You get immediate funds to run your own business
4) Once the customer pays the factoring company, you get the second installment (of 15% to 30%) and are charged a small fee as an interest for the transaction. This is called the rebate
Although factoring costs vary and are based on transaction size and timing, the average cost of interest on a transaction is usually between 1.5% to 3% of the invoice per month.the factoring line can be set up in about a week, and the biggest requirement for approval is that do you business with credit worthy clients.
Invoice discounting is a type of financing which is not offered by a any bank – it’s offered by a factoring company.Invoice discounting, as it implies by name, which involves selling your invoices for immediate cash, at a small discount. Its value proposition is very simple. Are you willing discount between 1.5% to 6% from your invoices to get paid now? Consider that many business owners offer a 2% discount to businesses that pay within 10 to 15 days. So, invoice discounting offers a similar proposition.
Of course, invoice discounting (or invoice factoring as it is also called the same) its not for every business. It works best when your profit margins are above 15% and if you use the accelerated funds to pay for business expenses or to pursue new business opportunities.
Factoring companies always purchase your invoices in two installments. The first installment, referred to as the advance, covers up to 85% of the invoice. The remaining 15% (less the discount) is rebated once the customer actually pays the invoice.
Invoice discounting is easy to obtain and can be set up in days. The biggest qualification requirement is to have invoices from reliable clients. So, if you are sitting on a whole bunch of slow paying invoices, be sure to consider invoice discounting