All businesses have creditors and debtors. In terms of the balance sheet these are referred to as assets and liabilities. When you are owed money on credit, this is referred to as Accounts Receivable.
You bill each customer for the amount they owe you and until they pay, each invoice is recorded as Accounts Receivables in your books. But even though this figure actually represents current assets to your company, they cannot be used to finance anything. That’s where Small Business Financing comes in.
Small Business Factoring is also known as Invoice Factoring. In this type of Commercial Financing, a Small Business would sell their Invoices to a Factoring Company. An Accounts Receivable Factoring Company is a business that specializes in providing Working Capital in exchange for the future income of the company. The Factoring Company usually advances a predetermined percentage of the total amount of Invoices outstanding to the company selling the Invoices. Advance amounts vary from Factoring Company to Factoring Company but generally the advance amount is usually 85% of the invoice face value.
Once you enter into an agreement with a Small Business Factoring Company, the Factoring Lender will now take over the rights to collect the debt amount from your debtors. Thus your debtors would be informed to pay the Factoring Company directly on behalf of your company. This works out to be a win-win situation for you and the Factoring Company.
There are several advantages to Small Business Factoring such as:
1. Increase Cashflow: You will be able to meet financial obligations such as payroll, pay suppliers and rentwhat ever it is that your company needs cash for.
2. Reliable availability of cash: Now you will not have to wait for 1 to 3 months to get the funds you need to operate. Now you will receive your money within 2 days of delivery of your goods.
3. Small Business Factoring is less cumbersome than traditional bank financing: Many bank programs require monthly reporting to the bank. Factoring Companies are generally not interested in you doing monthly reporting, they will often do the reporting for your in regards to your sales generated on a monthly basis.
4 Less strings to deal with. Again, as we all know, banks will tie up everything in value when they lend you a little money. Small Business Factoring companies will have far less rules and covenants to deal with in general.
To get more information on Small Business Factoring for your business, speak to your Commercial Finance Broker as they will have the resources for the Best Factoring Company for your business.