Behind the Scenes: How Factoring Companies Work to Boost Your Business
Running a business is not an easy task, especially when customers take a long time to pay invoices. When this happens, companies will have to go out-of-pocket for their operational expenses while waiting for their funds to arrive. The good thing is that a factoring company can help bridge this financial gap.
In this post, we will answer questions like ‘how does invoice factoring work?’ and how it can benefit your own business.
How does factoring work?
How does a factoring company work, you ask? Below is a quick rundown of the process to help you understand how you can receive instant funding through factoring:
Step 1. Application
To get started in factoring, you must complete an application with the factoring company. This application will require information about your business, your financials, and the outstanding invoices you want to sell.
Step 2. Due Diligence
Next, the factoring company will conduct due diligence to assess the creditworthiness of your business and your customers. This step involves verifying the invoices, checking credit histories, and evaluating the potential risks involved. This is to prevent the risk of non-payment, so your business won’t have to pay the amount back.
Step 3. Approval and Agreement
Once the factoring company determines that your business is eligible for factoring, your invoice will be granted funding. Take note that the factoring terms depend on your agreement with the service provider.
Step 4. Invoice Submission
After that, you can start submitting your invoices to the factoring company for funding. This can usually be done electronically or through online platforms provided by the factoring company.
Step 5. Instant funding
Upon receiving the invoices, the factoring company will advance a certain percentage of your invoice amount. This can range from 70% to 98%. This way, you’ll have immediate cash flow to cover expenses or invest in growth opportunities.
Step 6. Collection
So, how do factoring companies work at this point? Well, they will take on the responsibility of collecting payment from your customers listed on the invoices. They will handle all communication and follow-up related to your outstanding payments.
Step 7. Final Payment
Once payment is collected from the customer, the factoring company deducts its fee and releases the remaining balance to you. This final payment completes the factoring transaction.
How do factoring companies work for businesses?
Now that you know the process of factoring, you’re probably wondering, how does factoring receivables work for various industries? Here’s a quick preview of the major fields that benefit from this financing solution:
Trucking
Factoring for trucking is one of the major applications of this service.
So, how does factoring work in trucking? For an industry where invoices take 30, 60, and even 90 days to get paid, factoring allows fleet owners to turn their invoices into cash within hours.
This way, they no longer have to waste time chasing payments from customers. They can focus on getting more hauls and having more drive time, which translates to more profits in the long run,
Manufacturing
Manufacturing companies frequently face cash flow challenges due to the time gap between production and receiving payment from customers.
In this case, factoring companies can help by advancing funds based on the value of the manufacturing company’s accounts receivable. This allows the company to cover immediate expenses such as raw materials, labor costs, and overhead while waiting for payment from their customers.
Staffing
Like the first two industries, staffing agencies often experience cash flow issues. It’s because they have to pay their temporary or contract employees before receiving payment from their clients.
Just the same, factoring companies provide a solution by purchasing the staffing agency’s invoices and advancing a percentage of the invoice value right away. This allows the staffing agency to meet payroll obligations and other operational expenses without waiting for client payments.
Healthcare
How does a factoring company work in healthcare? Overall, factoring companies can assist healthcare providers, such as medical practices and hospitals, in managing their cash flow.
These practices often face delayed payments from insurance companies or government healthcare programs. The good thing is that factoring companies purchase the healthcare provider’s outstanding invoices and provide immediate funding.
This allows healthcare facilities to cover expenses like salaries, medical supplies, and facility costs.
Construction
Construction companies often face cash flow challenges due to the long payment cycles in the industry. In that case, what does a factoring company do for them?
Factoring companies can help by purchasing the construction company’s invoices and advancing a portion of the invoice amount. This allows the construction company to cover expenses such as labor, equipment rentals, and material costs while waiting for payment from clients or general contractors.
Conclusion
Factoring is a versatile and scalable financing solution for a variety of industries. Instead of waiting for weeks or months for payments, companies can sell their invoices to factors to receive immediate funding.
But unlike loans or traditional lines of credit, factoring doesn’t incur interest and doesn’t require exhausting paperwork.