What Is A Factoring Company, And What Does It Do?
Regardless of the industry, cash flow is the topmost priority for most firms. Businesses and companies want to maintain their operations. However, sometimes the delay cost by customers’ late payments or late sales of products would mean the business has no cash flow. This will virtually affect all aspects of the company’s functions.
To stay in business and meet their inevitable expenses like purchasing equipment, products, or supplies and completing payroll, the business will need extra funds or financial assistance. And here’s where factoring companies come in handy.
What Is A Factoring Company?
A factoring company is a financial firm that purchases the unpaid or outstanding business invoices or account receivables from other companies or businesses at a discount until the invoices are collected.
Instead of lending the business some money to sort their financial problems, the factoring company, therefore, buys the invoices and later charges specific interest rates when paid by customers. While doing this, they help free up cash for the company or the industry hiring them and earn money from the fees they charge in the process.
Why Would Businesses Work With Factoring Companies?
Unlike the banks and other traditional lenders, which operate on a line-based finance model depending on what the business owns, factoring companies offer an alternative form of finances. They:
Ensures Immediate Cash Flow
Nearly 70% of invoices are paid late, and the business will need funds to keep running or survive. And that’s the primary goal of factoring companies; ensuring immediate cash flow with flexible terms depending on the business finance needs.
Improve Business-Customer Relationships
Collecting invoices can sometimes bring administrative headaches. But, having a professional firm will help remove some burdens like arguing with customers on late payments.
It Helps Businesses Save on Time and Money
Unlike taking loans from the banks, which come with huge interests, plus the business has to show upfront collateral, factoring in Los Angeles ensures less time is taken on paperwork.
Also, most factoring firms take as low as 5-15% interest rates, meaning the business remains with a lot to run their operations.
How Does Factoring Company Work?
When the business sells or delivers a product and services to customers and other companies, they give them an invoice, usually for 30 or 90 days to pay. The business has to continue working during this time, and sometimes they need urgent funding.
So, the business may decide to sell its outstanding invoices to the factoring company.
- Once the factoring company purchases the invoices, they will give the business some advance, usually 75% or 90% of the total invoice face value. But that will also depend on the industry.
- Next, the company takes the responsibility of collecting the payments from the business’ customers.
- Once the customers pay, the company discounts the advance they gave, plus the interest fees agreed, then wire the remaining balances to the business’ account.
- This process will repeat for as long as the business needs urgent cash flow.
Nothing is more crucial to a business than having a solid cash flow. Contact us for any factoring in Los Angeles for immediate cash support or invoice management.