Pledging receivables to a factoring company at a discount in order for them to collect the payment. This is Small Business Factoring. The responsibility of the factoring company is to collect the payment of your accounts receivable. This is to be done as quickly as possible, and your company pays a fee for this service. Many of them, are paid at front with a range between 70% and 90% when they first collect your invoices. In most cases, the fees they charge range between 2% and 5%, but they can vary depending on the situation.
Why and when to use Small Business Factoring.
Cash flow is king for a company! 80% of business failures are directly attributable to a lack of Cash Flow and/or working capital. A company can grow at a rapid pace. But if billed monthly sales do not produce cash in time to pay wages or creditors, it may also fail due to lack of cash.
Small Business Factoring allows a company to sell their invoices to a third party.
This sale would be at a discounted price in exchange for an amount of cash in advance before the bill expires.
Besides the benefit of having cash available earlier than expected to cover operating expenses and growth, factoring does not usually affect assets outside the company. The process involves the payment of a debt at some future time or on a certain date. This funding frees the internal resources normally devoted to keeping track of accounts receivable collections and performance.
Small Business Factoring can be an attractive tool for many companies, but could be more appropriate for those whose activities are expanding rapidly. For businesses that have sufficient volumes of accounts receivable and sales levels, Factoring can also be a valuable financial tool.
Although there is a cost to your company for Small Business Factoring, the amount or a portion of it should be included in cost of sales and / or justified in terms of the value of having money available in advance for the operation of your business. Often companies can raise prices or take advantage of supplier discounts and benefit from better purchasing power which provides them with additional capital.
The following factors are imperative in the calculation of factoring fees:
Risk: credit worthiness of the debtors (customers).
Maintenance: Work that involves the administration of their accounts receivable. In other words, if you have a large number of small bills or a small number of invoices for amounts higher.
Collection time. The lesser the better.
The volume of the accounts receivable to be handled. The larger ones pay smaller fees.