What is Small Business Factoring really about?
Small Business Factoring is the process of selling your accounts receivable invoices to a third party, who then is responsible for collecting the payment. These agents, known as factoring companies, can move quickly to get funds for a company in exchange for a fee as a way to provide funding for development. Most factoring companies are initially paid in two stages: the majority (70 to 90%) in advance through the initial advance and the balance at the time of collecting the invoice. Factoring fees range from 2% to 5% or more depending on a number of variables.
Why and when to use Small Business Factoring.
That is easy to answer: Cash Flow. 80% of the companies go out of business because they do not have enough working capital for their activities. When companies that in spite of their rapid growth fail to produce enough cash for payroll and liabilities, they quickly see themselves in trouble.
Through Small Business Factoring your company immediately receives some cash in exchange for the invoices that are sold to the factoring company at a discounted price. Some of the benefits perceived by this process are: having a greater liquidity to pay expenses and liberating all those resources that were once destined to the collection of accounts receivable. In general, factoring does not involve the participation of other assets in the process or acquiring more liabilities.
Small Business Factoring can be an attractive tool for many companies, but could be more appropriate for those whose activities are expanding rapidly. For businesses that have sufficient volumes of accounts receivable and sales levels, Factoring can also be a valuable financial tool.
Naturally, Small Business Factoring has a cost. Nevertheless, you can add the total cost or a portion of it to your cost of sales due to the fact that it is the price of having increased cash flow available for your operations. Many companies increase their prices to be able to obtain discounts from their suppliers and have greater purchase power that results in more working capital.
The following factors are imperative in the calculation of factoring fees:
The level of risk of the accounts receivables they are undertaking.
Maintenance: Work that involves the administration of their accounts receivable. In other words, if you have a large number of small bills or a small number of invoices for amounts higher.
Time: refers to how long it takes customers to pay. After all, time is money.
The volume of the accounts receivable to be handled. The larger ones pay smaller fees.