The success of your business isn’t always measured by the number of customers you have; especially when not all of these customers pay on time to keep your cash flow consistent and reliable. Purchase decisions and future business plans are affected by not knowing when such payments will arrive. This limits what you can consider your working capital, and handicaps your business when it comes to making large purchase decisions.

Factoring Receivables as a Way Out

Factoring is a better bet than the alternatives when your business needs a substantial amount of cash on hand to fulfill a large order. A robust client might make a deposit, but this will rarely be enough to purchase the materials necessary for a large order, and you don’t want to make them seek business elsewhere by pressing the issue – being unable to do things on their terms might result in a loss of confidence that you can do the job at all.

With factoring receivables, you simply sell your invoices to a reputable factoring company; the cash you receive is commensurate with the size of your account and so is automatically capable of providing you with the cash flow you need for that client (and others). This direct manner of selling your accounts receivable at an agreeable rate trumps securing business loans with high interest rates and unwieldy repayment terms, when all you need is an immediate cash flow for services rendered – or in the process of being rendered. As with any good business, factoring helps you reduce the number of sources of long-term debt applied to your balance sheet.

How Does Factoring Work?

The key to factoring is the size of your accounts receivables or invoice. A factoring company buys this from you for a large fraction of the money owed to you; once all the debt comes in, they pay the rest of the money. The transaction fee for this advance is a fraction of the overall debt, and allows your business to move forward without a hitch during the economic “down-time.” In the competitive business sphere, this on-hand cash is invaluable as your company continues to grow and expand operations and customer base, purchase assets and manage growing operating costs. The importance of factoring to maintaining cash flow cannot be understated, which is why it’s gaining steam as more and more companies realize the benefits.