All About Factoring The Basics


Usually carrying 30 to 60 day payment terms are most sales to commercial clients. Being a supplier would mean that you have to deliver your products or services now. However, the time given to your client to pay you is 30 to 60 days.

For owners of small and midsize businesses, this will create a significant challenge. It's actually a simple problem. Your clients want to pay you in 30 to 60 days, but you must pay rent, payroll and your suppliers now. Have you noticed that the math does not work? Unless you have a substantial bank account, then an almost impossible situation is what this will lead to.

It is also very likely that the bank will not be able to help you if you are in this situation. You may be aware of the fact that banks only lend to businesses that have significant hard collateral and three years of profitable operations. You may need consider factoring as this is your best bet if you do not qualify for bank financing.

Factoring is a business financing tool that helps business owners who cannot afford to wait 30 to 60 days to get paid by their commercial customers. The necessary funds to meet payroll, make rent and pay your suppliers on time will be provided to you by factoring.

As opposed to bank financing, factoring is easy to qualify for. You need to have a profitable business that has a strong roster of commercial clients as this is a main requirement. For the factoring company, your best collateral is the invoices from your strong customers.

Factoring is also easy to use. Using factoring will enable you to receive a substantial portion of your billings within a day of invoicing. It reduces the time you wait to get paid from 60 days to 2 days. The transaction is usually structured as a two installment sale of an invoice. The advance is referred to as the first installment is immediately paid to you. The advance can be anywhere between 70% and 90% of the gross value of the invoice. Held as a reserve to cover disputes and charge backs is the remaining portion which is 10-30%. The reserve is rebated as soon as the invoice is paid in full. For this advice, the factoring company will charge a small fee.

An ideal tool for companies that are growing is factoring financing and it cannot afford to wait to get paid by the clients. It helps you to stabilize your financial situation and positions you for growth.

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