Managing a business is not always an easy task. As your business grows, higher levels of management are required, and usually more staff is needed. Business growth is the goal of any small business owner, but growth is usually accompanied by growing pains. As companies bring on more employees, the added cost of signing bonuses, new salaries, and benefit expenses often causes financial strain. There is the training period in which the employees learn to work with the company through trial and error. There are also adjustments that involve redistributing workloads and creating and filling new positions. If your business is experiencing growing pains that come with success, there are services designed specifically to reduce your stress levels during times of growth. One of the most helpful services is factoring.
What is Factoring?
Factoring is a financial transaction whereby a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. In “advance” factoring, the factor provides financing to the seller of the accounts in the form of a cash “advance,” often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and other charges, upon collection from the account client.
Breaking Factoring Down
Many people are intimidated by factoring services because of the complexity and depth of the process. The process is simple. The three parties directly involved are:
- The Seller: the one who sells the receivable
- The Debtor : the customer of the seller
- The Factor: the third party
The receivable is essentially a financial associated with the debtor’s liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash.
Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs.
The Factoring Advantage
Aside from receiving the majority of your payment immediately, other advantages of factoring services including:
- Happy Customers
- Predictable Cash Flow
- Saving Time
Customers like knowing that they can pay their bill when it fits into their budget. If your business is stressed about finances, that stress carries over to the customer. Don’ let finances force your business to torment customers. Remember customer satisfaction is the leading determiner of growth rate. Keep your customers happy and they will come back again and again.
Predictable cash flow is not always easy to maintain in business, mainly due to the uncertainty of invoice payment. We already know that factoring eliminates that uncertainty by immediate invoice payment. Factoring services help you manage your business exactly how you see it on paper. Know exactly how much you are bringing in each month, and exactly when it is coming in. This predictable cash flow means you can spend less time crunching the numbers and more time brainstorming business plans.
Don’t let your business growing business bring you down. Let factoring services help you bring on the new staff and equipment you need to succeed.