Small business factoring, an excellent financing option for SMEs.
Small businesses face stiff competition from large established companies in terms of cash flow and smooth operation of a business. When it comes to transactions involving a large amount of money or long shipping processes, the client may request a payment term that allows them to pay between 30-60 days. Staying afloat during this period can be difficult, as the business requires continuous cash flow.
Small business factoring.
Traditional financing institutions such as banks and other credit institutions offer to fund, but the procedure is long, tedious, and requires collateral. These conditions are burdensome to small businesses. This problem has been solved for these small business enterprises by small business factoring. This is a way to quickly obtain cash by selling the outstanding invoices to a factoring company at a slight discount. It allows companies to:
- Deal with an unexpected increase in payroll
- Smooth out uneven cash flow
- Make it through a financial setback or fund growth
Small business factoring is a financial tool that helps businesses get paid faster for work they have already delivered. This method provides instant cash with more flexibility and no debt to repay since it is paid equivalent to its invoice. Companies mostly start factoring business invoices to get instant cash, but they continue because unlimited cash flow is beneficial to their business. There is no minimum amount of money required to fund since the company decides which invoices they will factor in. The amount of available cash you can get grows as your business grows, as long as the paying history of your clients is decent. Factoring provides a strong financial base for a small or medium-sized business. This method of cash acquisition has existed since the 1300s-1400s in the Roman empire. The traders delivered trade goods to customers at a credit. Merchants would trade this contract instead of the actual goods. Today factoring has become widespread due to:
- Internet access
- Technological access
- Increased competition
Industries such as recruiting, manufacturing, construction, courier services, oil importation, and exportation companies have benefited. It is popular among small businesses because it is an easy way to get financial support. Invoice factoring is a good financing option for all types of businesses, no matter the industry. This type of financing plan works well for some growing companies. This is because they help you use funds currently locked in unpaid high-value invoices, which lowers a firm’s days sales outstanding (DSO) metrics.
Steps of getting small business factoring
Finding a factor.
Once an invoice has been sent to a client and he/she has agreed to pay, then a factor is to be identified. A factor refers to the company buying the invoice. The invoice must be payable within 90 days to be eligible for factoring. A factor should always meet the businesses’ needs and budget comfortably.
Reaching an agreement between the factor and the business.
The agreement must be favorable and attainable. It must cover:
- The amount and frequency of invoices that are being sold
- The cost of factoring
- Payment plans
- Any additional fee
At this point, the factor will review the credit of your company, transaction history, and the invoices being factored in. When all terms and conditions have been drawn, then all parties sign the agreement.
Initial payment.
The factor pays an initial amount specified in the agreement known as the advance rate. It is normally at least 80% of the factored invoice value to the business being factored. The factoring company notifies the affected customers that they are assigned to collect the debt. The notice informs the clients of your factoring plan and provides detailed instructions on making future payments. Invoice factoring involves re-assigning the receiver of your client’s bill
Collection and payment.
When the client has paid the factor, the factoring company sends the business any remaining balances known as the reverse amount. This is paid to the business after the factoring company has deducted payment for their services as agreed on the agreement.
Conclusion.
Small business factoring seems ideal for small firms to obtain quick cash without going into debt, but there is also a downside to factoring. To get the best of factoring, one has to prioritize getting a good factoring company. This is done by comparing several companies and conducting thorough research on several aspects like the reputation of the factor and the length of the factoring experience. The company must deliver the funds within the shortest time possible to minimize disruption of normal business activities.
