What is a Factoring Company and How to Pick the Best!
A factoring company provides financing to businesses that are experiencing cash flow issues as a result of slow-paying invoices. Factors purchase accounts receivable from their clients at a little discount.
The client receives immediate funds from the sale of their receivables, which resolves their financial issues. Instead of waiting 30 to 90 days for the customer to pay, a business can access cash flow immediately after issuing an invoice.
How factoring companies work?
The factoring company purchases the receivable in two installments payments.
The first installment is called an advance and is financed when the factor purchases the invoices. The advance covers 80 percent to 90 percent of the invoice. Advances vary according to the transaction’s risk profile.
Once the end client pays the invoice in full, the remaining 10 percent to 20 percent of the invoice, minus a small factoring charge, is advanced as a second installment. The payment is settled with this payment.
Some trucking businesses frequently qualify for higher-than-average advances. These purchases can often be completed with a single installment advance of up to 98 percent.
Advantages of factoring companies
Here are some of the advantages of a factoring company:
● Quick cash for your business
Factoring companies offer quick cash to keep processes running smoothly.
● Easier approval than a traditional loan
Factoring companies pay the most attention to the credit scores of their customers.
● More flexibility for your clients
With the increased cash flow, instead of requiring immediate payment, you can give them a month or more to complete the invoice.
● Helps manage overdrafts
Factoring can assist you in meeting the required minimum balances on your bank account and pay to settle your business’s own dues.
● Highly accessible
You should be able to receive the cash within hours of filing an invoice after opening an account with a factoring company.
How to choose a factoring company
Factoring firms do not come in one size fits all. There are many factoring companies that focus on specific industries like trucking.
Below are some of the questions to consider while choosing a factoring company:
● How long the company has been in business
When you choose a partner with several years of experience, you automatically exclude those factoring companies that do not have an established and reliable operational history.
● Factoring the company’s terms, fees, and funding limits
The industry standard for an agreed term is one to two years. Agreements often renew automatically if a 60 or 90-day notice is not issued.
The best factoring companies present fees in an upfront manner.
As your business expands, you’ll need a plan for the next phase. You don’t want to wait until you’re up against the limit to make the plan. Find a partner who can grow with you.
● How quickly will the invoices be funded?
The best factoring companies allow a business to submit and factor invoices on a daily basis. The business presents the invoices, and the factoring team processes and funds them within 12-24 hours. Make sure your factoring company’s speed matches your cash flow needs.
● Where are the factoring company’s funds coming from?
Knowing where the funds came from can help you understand how competitive your cost of funds is and how likely it is that the factor will have funds available when you need them the most.