How Are Factoring Loans Used in Business?

Businesses must look at a slew of financing options in order to choose the right one for their situation. One loan that people often don’t think about is a factoring loan – which technically, actually isn’t a loan at all.

What is a Factoring Loan?

Factoring allows businesses to sell the accounts receivable they have accumulated to outside financial companies (called factors). This lets the businesses use the funds faster than needing to wait for the customers to make their payments. In essence, they are speeding up their accounts receivable so that they are better able to move on to other things without waiting long months for the money to come in. When these accounts receivable are sold to factors, not all of the money is given to your business immediately; you can usually expect about 75% of the account receivable invoices at that point, and then the rest will follow once the company is able to collect the full invoice.

The Details

In order to make some money out of the deal, factors tend to take anywhere from 2% to 6% of a cut from the total they collect from your invoices. They collect funds directly from your customers and might ask you in advance to provide proof that your customers have paid their dues in the past (this can give them a better idea of what risk they are taking on). Not only does factoring typically work faster than the approval process of a regular loan, but you won’t have any repayment terms or need to worry about debt accruing in your business.

Who Might Like to Use Factoring?

Since there are no requirements for collateral, a down payment, or a specific credit score, many businesses might benefit from using factoring. Businesses that haven’t been open for very long or those that need money fast might find factoring to be a helpful financing alternative. Another side to factoring that people forget about is that they won’t need to staff employees to continue doing the billing and payment processing for those accounts receivable. When maintaining cash flow is paramount, rather than going through the process of getting a short-term loan, factoring might be a better option.

Although factoring can have its pros and cons, thousands of businesses use it as a financing option. There are many different types of factors to choose from such as banks, small firms, or industry-specific investors. If you think factoring is something your business might be interested in using, give us a call today to see how it can impact your business!