What is Factoring for Businesses?
One of the least talked about types of financing that is available for businesses is known as factoring. In fact it is so rarely talked about that most business owners have never even heard of it or know what it involves. Despite it’s rare usage factoring can be really helpful for certain businesses. Here is a look at what exactly factoring is and what businesses might benefit from it.
Factoring is the process of a business selling their invoices and bills from clients to an outside company. For only a small fee this company will go ahead and issue your company a part of the invoice up front and the rest when the client or customer pays on the bill. Many businesses consider this a great way to be able to get money up front without having to worry about the client paying. The waiting period that clients have to pay the bill or invoice disappears when factoring is used.
What businesses should use factoring?
Factoring will generally only work for businesses that are just starting out in the business world. That is because these businesses will need the capital ahead of time and not have the luxury of waiting for customers and clients to pay on their invoices. Once a business is established and there is a little wiggle room for clients to pay there is no reason to pay another company to give you money up front, you might as well collect the money yourself.
How Much Does Factoring Cost?
Factoring is a fairly cost effective financing option. The company will generally charge a fee of around 2-3% to run the service and collect the money from the customer. The money upfront that the business receives is usually 75-80% of the invoice with the rest of the invoice being paid when the invoice is paid by the customer.