Factoring helps small businesses raise capital by selling receivable accounts or receipts to a commercial finance company called “Factor”. The goal is for you to receive quick cash for your business while waiting for customers to pay.
Factoring is very common in some industries, such as the garment industry, where long maintenance is part of a viable business.
Factoring is not a business loan – it is the sale of an asset (receipt). Basically, the element is buying the right to deposit on the invoice. When it is paid, you will get a discount of minus 2 to 6%. The element will pay about 75% of the invoice, and the rest will remain after it is deposited on the invoice.
Because factors are paying your customers an invoice, they are more concerned with your customers’ financial status. Factoring companies will collect directly from your customers and you may need to verify your customers’ payment dates. If your business has reliable customers, factoring can help your business grow to the forefront.
The biggest benefit of factoring is the rapid growth of working capital, as many factoring companies will pay for your receipts within 24 hours. Since factoring is not a loan, you do not borrow the money you receive.
However, factoring is usually a short-term solution. Achieving one percent of your profits is not always the best way to sustain or grow your business. Unlike a line of credit, business factoring provides you with working capital at a time, not permanent access to the funds you need.