Factoring is a great way for small businesses to generate convenient short-term financing.
Many businesses sell their invoices to factoring companies in exchange for immediate cash as a method of improving cash flow. This is often used as an alternative to taking out a line of credit from a bank or other financing firm.
Factoring monetizes a large share of the value of an invoice on the very day it’s sent to a customer. This generates cash flow and allows the business to meet its financial commitments. In a non-recourse deal the contractor sells off the risk of non-payment, unless there is a genuine dispute with the invoice. This enables the company to neutralize bad-debt risk.
Once the initial factoring fee is paid, the contractor’s administrative duties are done. For businesses that deal with multiple invoices, this can significantly reduce administrative expenses. You’ll also eliminate the need to deal repeatedly with banks for short-term loans backed by invoices.
Since you know when and how much you’ll be paid, factoring helps streamline financial planning and makes it’s easier to plan capital investments, expansions and other business expenditures. Factoring also improves decision making by providing a business with valuable information: factors often run credit checks on your customers and share that information with you, allowing you to better understand their situations and thus your potential risks.