Companies that have a hard time keeping cash flow consistent along with dealing with clients that don’t like to pay their invoices in a timely manner often sell those invoices to factoring companies, called factors. The factor provides an advance on the invoice, typically up to 90%, after they do a credit check on the client originally billed. Once the original client pays the invoice, that payment goes to the factor.
Businesses that use invoice factoring get to see the money they’re owed sooner than the 30-60 days they would originally be waited. Approval for factoring is quick, typically providing you with the advance within 48 hours.
Businesses can use this funding method to get their feet off the ground. Bank loans and other traditional methods of funding depend on your business’s credit, which tends to not be that great (or even exist) if you’re just starting out. Factors, however, look at your client’s’ credit, as they’re the ones who will technically be paying them.
Companies of all specializations use factoring, such as trucking, healthcare, and construction. Some of these companies use it to meet their cash flow needs. For example, if your budget is tight and a piece of equipment breaks, normally you’d have to wait until a customer paid their invoice to obtain the money to replace or fix it. With factoring, you’ll only have to wait the 24-48 hours it takes to get approval and the funds. Other companies prefer to use factoring over traditional methods of funding because it’s less involved than applying for a bank loan, and the factors aren’t looking for a piece of the company like other traditional investors. In addition, the factoring firm you choose to work with handles collections, therefore you don’t have to worry about any credit checks, billing, or hiring anyone to take care of these steps.
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