Businesses often find themselves in the difficult position of having more business than they know what to do with, but not having the same problems when it comes to cash flow. Since many businesses work on the concept of invoices and accounts receivable, customers that aren’t prompt in payment can leave the business in a difficult spot. It’s hard for a company to be busting out at the seams with business and then find themselves without the necessary cash to continue to fill orders.
Factoring as a Solution
Fortunately, there are methods that are available to business owners that can help mitigate these cash flow situations. One such option is known as factoring, and this particular option has become widely used by businesses that have to deal with customers that don’t pay their bills on time.
What is Factoring?
The basic form of factoring is a business transaction where a lender or a factor loans money to the business using outstanding invoices or accounts receivable as a lending baseline. The amount of money loaned generally equates to around 70% of the actual value of an outstanding invoice.
The Cost Included
This money also includes interest rates and upfront transaction fees. These types of fees are essential for the factor to make a profit off of this financial transaction. Once a business receive payment for an outstanding invoice that has been borrowed against, they will then remit the loan amount to the factor, and this completes this financial transaction.
Transferring Ownership of Outstanding Invoices
There is a different type of factoring where the lender legally takes possession of the outstanding invoice. This relieves the business that originally owned the invoice of their collection duties. However, this is usually a bit more expensive than standard factoring.
While there are many details about factoring which simply can’t be covered in such a limited article, it is a possible solution for a business that has a great deal of operating expenses tied up in outstanding invoices. If your business is dealing with customers that refuse to be prompt when paying invoices, and your business is feeling the financial pinch because of it, factoring may be a possible solution. In these cases, it would behoove your business to learn more about this particular option.