The most frustrating time for any business is waiting to get paid from its clients. This may occur due to some slow paying customers or any kind of delayed payments. However, one needs to pay his staff, buy inventory and raw materials to get his business going. In addition, he will have to pay for office maintenance which includes bills and expenditures. Therefore, to aid in this process, people often turn up to a factoring company for invoice factoring.
What is a factoring company?
A factoring company is a financial institution which pays a business on the basis of its accounts receivable. This helps the business to free up their cash flow. It allows the owner of a business to cover payroll, meet expenses as well as expand their business. In other words, it helps a business to maintain its regular cash flow.
How does it work?
When a company delivers the services to its customers, it receives an invoice. The company sells this invoice to one of the best factoring companies of his choice. In return, it receives about 70%-90% of its invoice value.
As a result, this company can expand its inventory, buy stock and pay its workers on a regular basis. Now, once the customers pay the required amount to the business, the company is liable for a rebate on the remaining funds minus the fees taken by the company. The whole transaction benefits all three parties – the company maintains its cash flow, customers receive service from the business, and the factoring company receives a fee.
Briefing with an example:-
Suppose, company A has an invoice of $10,000. The maintenance, payroll and inventory expenditures sum up to $7,500. But it has received a sum of $2,000 from its clients. As a result, company A knocks the door of a factoring company.
It sells the invoice of $10,000 and receives about $7,000 on the invoice value. Now with a total sum of $9,000 company A’s expenditure of payroll, maintenance and inventory are covered. On the other hand, the factoring institution takes a fee from company A for this whole transaction.
How to choose such a company?
Majority of the best factoring companies will provide 70%-80% of the invoice value. However, besides these some other points are also relevant while choosing a factoring company:-
- Response time:
When a business needs cash, even a day’s delay can make a lot of difference. Reliable factoring companies such as Alliance one will provide you with an amount within a span of 24 hours.
- Cash Advances:
It is important to take a note of the percentage of the invoice provided by a factoring company. While standard values range between 70-80%, one should avoid any company that claims to pay more than 90% of the invoice value.
- Reliability and Experience:
This is one thing only fellow businessmen will be able to project. It is vital to know the duration for which a factoring company is operating and its authenticity in the market. Word of mouth from your fellow businessmen is the ideal way of finding the reliability of such a company.
Therefore, one can clearly see that the need for a factoring company is essential in maintaining a steady cash flow to your business. Moreover, it is also essential to grow your business. Therefore, if you re also facing similar delays of payment from your client, factor your invoice from a reliable company like Alliance one. See your business grow in no time.