Factoring is often a bit mysterious to small business owners and, at first glance, it may seem like a solution that is simply too good to be true. But such is not the case as financial factoring is a long-established process that benefits the business as well as the factor.
A quick summary of financial factoring will help clarify how the process works. After a business completes a service or provides a product, it invoices their customer. Often, the business may then have to wait one to three months for the customer to pay based on the terms of the invoice.
The business, in order to get up to 80% of the total of the accounts receivable, may choose to sell them to a factor. This is a third-party company, not a bank, that then assumes management of the accounts receivables they purchase. Once your customer pays the factor in full, the factor deducts the fees, typically 1 to 3%, and wires the balance of the 20% withholding into your account.
How Factors Process Applications
With financial factoring, your business’s credit score is really not relevant; it is the creditworthiness of your customers that is of importance. The factor typically will have experience in your industry and will also be able to evaluate your customer’s ability to fully pay the accounts receivable you wish to sell.
As you have already completed the work or provided the product, there is no need for a personal guarantee or any type of collateral. Instead, the factor considers the risk within the industry as well as the history of payments from your customers.
Application for factoring is therefore very simple. It is done online and will require basic business information that is not at all complicated or difficult. You will also have to submit the invoices you wish to sell once approved.
Typically, a company interested in obtaining factoring will be notified of approval within one business day. Once the accounts receivables are submitted and approved by the factor, the initial 80% can be in the business account in just days.