One of the biggest challenges business owners face is maintaining a consistent cash flow. Invoices can take weeks or even months to get paid, leading to financial difficulties even if your business is profitable. The good news is that a factoring company can help. Keep reading to learn more about what a factoring company is, how it works, and why it is an option you should consider for your business.
What Is a Factoring Company?
A factoring company (also known as factor) is a firm that provides cash to businesses in exchange for their outstanding invoices.
In other words, a factoring company buys your unpaid invoices providing you with a fast infusion of cash, and then collects the invoices from your clients in exchange for a small fee.
This way, you get cash upfront without having to wait 30 to 90 days for your customers to pay you, accelerating your revenue cycle and helping you avoid bad debt.
How Many Types of Factoring Are There?
There are two basic types of accounts receivable factoring: recourse and non-recourse.
In recourse factoring, the factor has the right to ask you to cover any unpaid receivables if the customer fails to pay the invoice. This means that if your customer cannot pay the factor, then you are responsible for repurchasing the unpaid invoice or reimbursing the factor.
By contrast, in non-recourse factoring, the factor assumes the risk of non-payment by the customer. So, If a non-payment occurs due to customer bankruptcy or other credit-related issues, the factor absorbs the loss.
What Are the Benefits of Factoring?
- Factoring provides businesses with immediate working capital, which can be used for a variety of purposes, such as investing in new equipment, hiring staff, or expanding the business.
- It also eliminates the need for businesses to wait for clients to pay their invoices, which can dramatically improve cash flow.
- Working with a factoring company reduces the burden on your administrative staff because the factor takes care of the collection process.
- Factoring also helps you avoid taking on debt or giving up ownership of your business.
- Plus, since factoring agreements usually do not require long-term commitments or minimums, they increase the flexibility of your business.
Is Factoring Right for Your Business?
Whether or not factoring is a good option for your business depends on a variety of factors, including the size of your business and the consistency of your cash flow.
In general, if your business extends credit to clients and struggles with cash flow due to delays in payments, then factoring could be a viable option.
Wrapping It Up
Factoring companies provide a way for businesses to obtain immediate cash in exchange for their unpaid invoices.
Other benefits of factoring include flexibility, decreasing the burden on administrative staff, and avoiding bad debt.
If your business has a predictable revenue stream but struggles with slow-paying clients or can’t access traditional financing, then receivables factoring is a good option to meet your financing goals.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.