Any small to medium business growing at a fast pace requires a steady bank balance at all times mainly for salaries, payments to suppliers and even expansions.
If you have a fast growing business with a gross profit margin of above 15 percent and you require ready funds to increase your business, then you could be better off taking the services of a factoring company.
When you sell to your customer on credit, then you have to issue a sales invoice. You will then have to wait for 30 to 60 days depending on the credit period to receive that amount. This means that your money is blocked for that particular time and more if your customers delay the payment. When you have many pending invoices, you make a receivables statement, which is a list of all the pending invoices for which payment is yet to be received.
Receivables factoring is the process by which a third party, i.e. a factoring company buys your pending invoices and pays you the invoice amount minus a factoring fee in 2 installments. The first installment, usually 60 to 90 percent is paid within a day or two to your account electronically, and the balance amount minus the factoring fee, normally 1.5 to 15 percent is paid when your customers pay the invoice amount to the factoring company.
In short, they charge you a small fee for converting your headache to their headache. The advantage you get is multifold. You may have to apply for a loan from a bank to get ready funds, but that would require extensive documentation and time, and you would still have to pay a fixed interest on that loan. In factoring, you pay charges only on the invoice amount, which may go up or down depending on your sales. Or you could go in for capitalist venture funding that could result in interference in running your business. Receivables factoring is not only easy, but it also compliments your business, since the factoring company takes care of collecting payment from your customers as well as maintaining and sending you fresh receivables reports.
The factoring fee depends on some factors like the credit rating of your customers, the length of credit period and the receivables amount generated every month. So, if you are planning to hire a receivables factoring company, you should look at various factors like the factoring fee, the services provided by them, the length of the contract period with them and their overall quality of service in handling your customers. You should look at the quality of service first even if their rates are marginally higher because good relations with your customers are very important.
You can search for factoring companies even on the Internet or you can hire a factoring broker to do the same. The factoring company should be in a comfortable position to handle the volume of your receivables however large or small. Their service and attitude towards customers should be efficient and polite. Factoring brokers can help you to find a matching factoring company for your needs and you may not pay him any brokerage since the factoring company usually does it.
So, these are all the factors you may need to know about receivables factoring and if you do need their services, go for it.
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