One very appealing option for any business that is looking for capital is factoring receivables. It is unlike most other financing options, so it is often overlooked, but it can be much safer and easier. Basically, your business sells its accounts receivables to a factoring company, or “factor”, for slightly less than the invoice is worth. When the payment is due, the factor collects the money directly from the end customer. In this way, a business can receive capital quickly and painlessly without having it tied up in invoices. This makes it perfect for conveniently covering sudden or unexpected expenses.
The primary advantage that factoring receivables has over a traditional loan, is that you are never borrowing money. You are merely paying a small percentage of the capital you already have, to make it accessible quicker. This removes all of the risk of taking out a loan because it is impossible to miss payments or fall short in a month. Most factoring companies will charge anywhere from 10% to 5%, or even as little as 1%, of the invoice depending on the conditions.
A unique attribute of factoring that other types of financing lack is that there are benefits completely unrelated to finances. Some companies that are not in need of extra capital will factor their accounts solely because it makes their income so much simpler. The idea of having a single point of contact for profits can be very attractive. You can actually save time and money on managerial duties.
There are two types of factoring receivables and it is important to understand the difference and choose the options that is best for you. The most typical type of factoring is recourse factoring. With this option, the original holder of the invoice is responsible if the end customer defaults on their payment. This means that you might be forced to buy the invoice back from the factor if the payment is not paid. This is virtually the only risk involved with factoring. Alternatively, the factor will be responsible if you choose non-recourse factoring. These deals usually have a steeper charges to compensate, however. Many companies will actually use non-recourse factoring as a safety net. If a customer is unreliable, you can factor the invoice so that if they fail to pay, you do not lose money.
There are many options for gaining working capital and factoring receivables is only one of them. It is, however, one of the most beneficial and risk free solutions that can provide some very unique advantages financially and otherwise.