So, how do factoring companies work? As a small business owner, you may be facing cash flow problems. These problems are likely putting a crimp in your business funding and expansion plans. A common cash flow headache is slow invoice processing by your clients. Instead of paying you in a timely fashion, they may have extended invoice processing schedules of 45, 60 and even 90 days or more. This puts you in a bind and looking for an answer on how to get your money faster. But how can you make your clients pay on a quicker schedule so you can improve your cash flow?
Well, you may not be able to get them to pay faster, but there is a way to get the money your slow-pay clients owe you in a quicker, convenient and effective way. It’s called invoice factoring. You may have heard of the term but aren’t sure what it means. Invoice factoring is a business funding solution whereby a factoring company, such as Charter Capital, will “buy” your invoices and accounts receivable from you. You get immediate cash to fund your business, pay your employees, buy new equipment or supplies, or to expand your firm. The factoring company is now the one responsible for collecting what had been your invoices. You’re relieved of the burden and the waiting. Instead of an unpaid invoice and a cash flow problem, you have the funds you need to be a success and grow.
How do factoring companies work & how do they differ from banks or traditional lenders?
You may think factoring companies are something new. Not at all. Invoice factoring and factoring companies have actually been around for centuries! It’s a tried and true method for business funding and works especially well for small businesses, which are often prone to cash flow problems and need assistance from time to time. A factoring company such as Charter Capital provides that assistance.
Not only is invoice factoring a quick, convenient and effective business funding solution, it’s much easier and carries less risk than taking out a bank loan. With a bank loan, you must submit a business plan and tax statements, then wait for the bank to make a decision. If the bank grants a loan, then you must make regular payments until the loan is repaid. With invoice factoring, the factoring company asks for none of those things. You simply submit an invoice and receive immediate cash in return. Even better, you’ve nothing to repay later on.
Invoice factoring enables you to outsource your accounts receivable. The factoring company is now your accounts receivable department, available at a moment’s notice. Rather than spending your time and effort trying to collect on invoices, you can get paid for them today and devote more to focus on what’s really important – your business.
As the factoring company pays you immediate cash for your invoices, you now have the needed capital to accomplish your goals. Business funding is less a concern. Your accounts payable problems ease. You have greater financial flexibility to grow, expand and even take advantage of early payment rewards or gain discounts from your vendors. Finally, invoice factoring can provide a way for you to better monitor your customer service and early detect potential problems.
To learn more about invoice factoring, how it can help you solve cash flow problems and deliver efficient business funding answers, call Charter Capital today. Our knowledgeable representatives understand the funding needs of small businesses and the problems they face. Let us introduce you to the convenience and security of invoice factoring.
Facts About Factoring Companies
Get Business Funding Without Borrowing
Factoring Companies help to offer relief for one of the main reasons businesses fail – poor cash flow. Even successful businesses, at one time or another, have experienced cash flow problems.
Conventional wisdom dictates that you must borrow money to inject cash into a business. Don’t be fooled — banks are not the only places you can get business funding. A factoring company can provide an available solution in which companies would not have to incur new debt.
Factoring Compared With Other Types Of Financing
Compared with other conventional types of loans, factoring stands out as an easy, affordable, and practical way to borrow money.
|Factoring||Leasing||Going Public||Venture Capital||Bank Loan||Private Investor||Government Programs|
|Requires Personal Guarantees||No||Possibly||No||No||Yes||No||Possibly|
|Days to fund||1 to 3||15 to 30||120 to 170||90 to 180||60 to 180||15 to 90||60 to 180|
|Aproval based on prospect’s credit||No||Yes||Yes||Yes||Yes||Yes||Yes|
|Funding tied to sales||Yes||No||No||No||No||No||No|
|Give up equity||No||No||Yes||Yes||No||Yes||No|
|Give up control||No||No||Possibly||Yes||No||Possibly||Possibly|
|Limited to asset value||No||Yes||No||No||Yes||Possibly||Yes|
Factoring companies offer alternative financing for businesses of all sizes and stages. From start-ups to long-established companies, invoice factoring is a smart solution to combat cash flow crunches without taking on additional debt.
What is Factoring?
How do factoring companies work? Simply, factoring is the process of selling accounts receivable to an investor rather than waiting to collect the money from the customer.
Factoring Companies have the financial backbone of many of America’s most successful businesses. Ironically, invoice factoring is seldom taught in business schools, is rarely mentioned in business plans and is relatively unknown to the majority of American business owners. Yet it is a financial process that enables thousands of businesses to prosper and grow and frees up billions of dollars each year.
Interestingly, factoring has been around in many forms for thousands of years. Factoring companies are private investors who pay cash for the right to receive the future payments on unpaid invoices. An unpaid receivable (invoice) has value. It is a debt your customer owes to your company and agrees to pay in the near future.
The Principles of Factoring
Although factoring companies deal exclusively with business-to-business transactions, a large percentage of the retail businesses use a form of factoring that is familiar to us all. MasterCard, Visa, and American Express all use a form of factoring in many retail transactions. In fact, these large consumer finance companies could be considered large factors of consumer paper.
Here’s an example: You make a purchase at the store and charge it to your credit card. The store gets paid almost immediately from the credit card company, even though you do not make payment until 30 day later or more. For this service, the credit card company charges the store a fee (usually two to four percent of the sale).
Factoring companies can offer many benefits to cash-starved businesses. Rather than waiting 30 to 90 days or longer for payment on a product or service that has already been delivered, a business can factor (sell) its receivables for immediate funding at a small discount off the amount of the invoice. Payroll, marketing, equipment and working capital are just a few of the business needs that can be met with this instant cash.
A factoring company provides funding for a manufacturer to replenish inventory and make more products to sell. There is no need to wait for earlier sales to be paid. Factoring is not just tool for manufacturers to manage cash since almost any type of commercial business can benefit from factoring.
Typically, most businesses that extend credit will have 10 to 20 percent of their annual sales tied up in accounts receivable at any given time. The fact is that you cannot pay utility bills or this week’s payroll with a customer’s invoice, but you can sell that invoice for cash in order to meet those obligations. Factoring receivables is a simple and fast process. The factoring company buys the invoice at a discount, usually a few percentage off the face value of the invoice.
The Costs of Using Factoring Companies
Savvy entrepreneurs consider the factoring discount a small cost of doing business. A four-percent discount for a 30-day invoice is common. Compared with the problem of having enough cash to operate, a four-percent discount is negligible.
Look at it this way: There is little difference between a prompt pay discount offered by many companies for invoices paid within terms, and the factoring company’s discount fee. Business owners consider the discount the same way they treat a discounted sales price: It is simply the cost of generating cash flow, much like offering discounts on merchandise is the cost of generating sales.
Receivable factoring is a funding tool used by a variety of businesses, not just the small or the struggling. Many companies use factoring to reduce the overhead of their own accounting department. Others use factoring companies to attain business funding, that can be immediately put to work to expand marketing efforts or increase production.
Why Are Factoring Companies Popular for Start-Ups
Factoring companies can be especially appealing to young and rapidly growing companies. Since using the invoice factoring process shortens the business cash-flow cycle, many businesses can get up-and-running faster. Virtually eliminating the wait for invoices to be paid, factoring provides immediate business funding to allow the start-up to rapidly expand services or manufacture more products to sell. Even when you consider the factoring company’s discount, these businesses usually net much more profit with factoring than without.
What industries do factoring companies help?
Numerous types of businesses can benefit from factoring receivables. Some industries that can benefit most are:
- Transportation & Freight Industry
- Staffing Industry
- Oil & Gas Industry
- Manufacturing Industry
- Security Guard Industry
- Service & Consulting Industry
Call us toll free at (877) 960-1818 or contact us today to find out how easy it is to set up a Charter Capital FactorLine. One of our account representatives will be happy to assist you.