Financing Your Business with Receivable Factoring
What is Receivable Factoring?
Receivable Factoring is a term used in the financial sector to describe the process of selling all or part of your accounts receivables to a third party. It’s primarily done by businesses whose major source of revenue comes from invoicing clients for goods sold or services rendered, but who have trouble getting paid on time.
The funds obtained through factoring can either be used as working capital for day-to-day expenses, reinvested into the business, or simply invested back into your own personal finances.
In this blog post you'll learn how to use receivable factoring to turn financing obstacles into an opportunity.
1. IT'S HIGH RISK, BUT VERY REWARDING:
Receivable factoring is the most efficient and fastest form of financing available. In fact, it's the only type of financing that allows your business to receive payment in advance. The selling process doesn't require any additional machinery or major changes on your business' operations.
But it's all risks. As soon as you sign up for a factoring program, all the risk related to bad debtors—customers who don't pay their bills on time—becomes your responsibility.
Some companies choose to mitigate the risks of factoring by selecting a reputable factoring company, and only working with good customers who are more likely to pay. But most businesses that sell their receivables do so regardless of how their customers are performing.
To find out whether your business is a good candidate for factoring, you'll need to know how the following factors affect your ability to get paid:
1. Your Payment Terms . If you offer longer payment terms, you'll have more trouble getting paid on time by your clients.
2. The Value of Your Invoices . If the value of your invoices is high, you'll have a harder time selling them to factoring companies.
3. How Many Customers You Deal With . The more customers you have, the more likely it is that some of them will go over their payment period.
4. The Size of Your Sales . If you have large sales, it's also probable that some customers will go over their payment period.
5. Your Inventories . If you have large inventories or extensive warehouse space, it makes it more difficult for you to sell your invoices on time because of the time involved in taking care of your inventory.
Factoring is a high-risk strategy because you're taking on the responsibility of securing your own receivables, but it's a profitable one because you get paid faster than in any other financing scenario.
In order to take advantage of this financing method, it's important to have a business plan that offers long-term profitability and cash flow.
2. WHAT YOU NEED TO SELL YOUR RECEIVABLES:
Most businesses use factoring companies to finance all or a portion of their sales invoices. The process is so simple that once you've chosen a program provider, you won't necessarily have to make any significant changes to your current business practices in order to start receiving money from clients faster than expected.
The factoring process usually consists of the following steps:
1. Send Invoices to Factoring Company .
2. The Factoring Company Acquires Your Invoices .
3. You Receive the Money From the Factoring Company .
4. The Factoring Company Collects Your Receivables From Your Clients .
5. The Factoring Company Transfers the Money To Your Bank Account .
To start using this financing mechanism, you'll need to choose a factoring company and provide it with a list of your clients, along with their contact information, invoice amounts, payment schedules and any other relevant details needed by the factoring provider in order to acquire your invoices.
As soon as the factoring company acquires one of your invoices, it handles the invoice sale process completely.
2.1 DOCUMENTS REQUIRED TO BEGIN A FACTORING PROGRAM:
To get started with a factoring program, you'll need to provide a copy of your business license (if applicable), a copy of your tax registration certificate, a list of all of your customers, along with all their contact information, and an overview of how they usually pay you.
You'll also need to fill out and sign an application form where you'll detail the type and value of invoices that you're interested in selling to a factoring provider.
2.2 WHAT YOU'LL PAY TO BEGIN A FACTORING PROGRAM:
Factoring companies usually charge an upfront fee for processing the sale of your invoices.
This fee covers the costs that the factoring provider will incur in making contact with all of your clients, and then acquiring their invoices for you. It's also used to cover any necessary costs incurred by the factoring company in keeping track of customer payments and property balances.
Factoring providers generally charge between 2% to 5% of the value of your invoice amount, depending on the type of business that you're selling. These fees are payable up front, before they take over customer-related tasks.
2.3 HOW YOU'LL GET PAID:
Factoring companies pay you with the money they receive from clients. The payment process is completely automated, so once the factoring provider takes control over your invoices, you won't have to do anything else besides waiting for your money to come in.
The process usually takes 7 to 21 days, depending on which country you're in and how fast the client pays. Once the factoring provider collects your invoice payment from a client, it sends a notification to your email address, and then transfers the money directly into your bank account.
2.4 TAX EFFECTS:
The money from factoring is taxable as income. This means you'll need to submit a tax return for the year you factored your invoices.
3. THE ADVANTAGES AND DISADVANTAGES OF USING FACTORING
3.1 PROS:
In most cases, factoring is a very lucrative business financing solution for businesses that sell their invoices because it doesn't require extensive investments, there's no risk of loss, and you get paid faster than expected.
3.
Conclusion
A factoring program gives a business financing support without the risks of an investment in receivables, while allowing the business to collect money faster than expected. Factoring is a very useful funding solution for businesses that sell their invoices on credit.
If you're not aware of how exactly factoring can help your business, then it makes sense to take advantage of this financial alternative now. Factoring may be a risk for some, but it's definitely worth taking for all businesses that are selling their invoices on credit.