Factoring is a quick and easy way for businesses to access cash that is waiting to be paid by customers. 30, 60, and 90 day credit terms are an expected practice for companies in the b2b market. By offering credit terms to customers, you build stronger relationships and gain market share that can ultimately drive sales. But while cash is tied up in accounts receivables, future business might have to be put off until these receivables are paid off. This is where factoring can be an effective financing tool to bridge the gap between payments and collections.
While rates and advance amounts vary for each client, financing can be priced as low as 0.75%/30 days and up to a 95% advance upfront. But more importantly, by factoring your receivables your business will have more flexibility and a less strenuous time managing growth.
If you can have the opportunity to work with the bank for financing, we say go right ahead! Banks offer the most affordable options and if your business can get approved, great; but banks tend to be very stringent on businesses they choose to approve and companies who are factoring are hoping to eventually fall under that criteria. Anyone who has ever dealt with a bank also knows it’s a long and slow process to get funding. It can often take months before funds can be withdrawn. If your business is looking for quick cash, alternative lenders can often setup accounts in as quickly as a week and provide same day funding.
Factoring is often perceived as an expensive form of debt, but it is a relatively cheap alternative in comparison to raising equity. While equity is a solution that does not cost the company money, it dilutes the overall value of each shareholder. So if a company is growing and profits are expected to increase, it may be a more viable solution for them to factor their receivables.
So next time your business is strapped for cash, consider factoring some of the receivables that have been aged >30 days.