Although one of the oldest forms of funding for businesses, many small business owners, entrepreneurs and startup companies still may be wondering what is factoring receivables and how can it help business.
If you are one of these business owners, understanding what is factoring receivables will help you to see how it can apply to your business. In reality, this is a form of an advance on your invoices. As it is an advance and not a loan, there is no interest and you will be aware of the fees and costs for this service in advance, allowing you to compare factors and determine the best services for your small business.
The Basics to Consider
All factoring services work in a similar fashion. A small business will apply to factor some or all of the accounts receivables. Some factors may require a minimum volume of accounts and some require a long-term commitment of six months to a year.
Other factors may offer greater flexibility, use as you need agreements, and no minimum volume of accounts receivable necessary. For most small businesses, this will be the best option.
The factor will advance approximately 80% of the value of the accounts you choose to sell. This money will be in your account in just days from the application. Then, the factor assumes responsibility for payment of those accounts, freeing up our office staff.
Once your customer pays the invoices in full, the factor deducts fees and costs and forwards any residual that remains from the 20% held. Some factors charge only a flat fee while others will include hidden fees and costs that can really add up.
Knowing what factoring receivables is will be helpful, but knowing what the costs are for the service is just as important. Look for competitive rates and no extra fees or costs for the best value for your business.
