How Businesses Use Factoring to Increase their Cash Flows

Cash flow problems are a common phenomenon in small and new businesses before they can find their footing. Cash emergencies can make the business collapse which makes factoring come in handy.

All about factoring

Factoring of your receivables allows you to sell the value of the outstanding invoices to a financier who advances you a percentage of the invoice amount in cash. Most factoring percentages range from 70% to 90% of the invoice amount. The invoice is first sent to a factoring firm who verify that it is valid. Mostly, it takes 2-7 days to issue you with the funds once your invoice has been approved. Once the financier sends you the money, they then assume the responsibility of collecting the invoice amounts from your customers. After the payment has been made, the firm sends you the remainder of your funds after deducting their fee.

Advantages of factoring

Immediate availability of funds and the speed within which you get it are the most common reasons why most businesses prefer this mode of financing. Your business’ eligibility is based on the creditworthiness of your clients. This makes it worthwhile for businesses that have experienced losses, have a negative net worth and them that are new.

Factoring vs. bank loans

For starters, businesses do not need credit to qualify for factoring funds. Besides, it does put your business at risk due to taking on unmanageable debts. Though loans provide temporary cash relief, loans have a fixed amount which should be repaid over a stipulated period which might not be the right way to fix the cash flow problems.

Factoring may be impractical for companies sending out invoices worth small amounts due to the service fees incurred on reviews for each invoice. For more information on how factoring can help your business contact Growth Commercial Capital.