Factoring, also known as invoice financing or account receivable financing, is a financial method that allows a business to access the capital denoted in their invoices before payment from their customers is due. Through the process of selling invoices to a third-party company, called a factor, a business can improve their financial status, positioning it for growth opportunities. A supply chain finance company uses tools such as export factoring and reverse factoring to provide tailored financing for your company’s cash flow needs.
How does Factoring Work?
To initiate the factoring process, you and your factor will establish a contractual agreement. Before the agreement is signed, the factor first vets the creditworthiness of your customers. Once the customers are approved, the factor then purchases your invoices and advances cash to your company. The factor will then collect the debts from the customers at a later date. This process allows you to receive cash promptly instead of waiting to collect the debt from your customers, thus giving you a steady supply of working capital.
What Are the Benefits of Factoring?
While the administrative elements are appealing, the biggest advantage of factoring is the ability to access your company’s finances faster, leading to opportunities for organizational growth.
Some benefits of factoring include:
● Reduced administrative overhead: By selling invoices to a factoring company, you free up the overhead involved in your business’s accounts receivable staff and tasks. This allows your business to utilize their resources elsewhere within the company. Factoring may also provide an opportunity for decreased payroll expenses.
● Flexibility: A startup company can just as easily benefit from factoring as a large and established corporation. Factor agreements can be adapted to fit the needs of your organization.
● Efficiency: Factoring simplifies the collection of invoices by transferring this process to the factoring company.
● Improved financial outlook: Factoring companies will often purchase your invoices for an upfront fee. This allows your company to access its funds faster, increasing financial and investment opportunities.
How Does Factoring Improve Financial Growth?
Whether you’re a local small business or an international corporation, the option to access quick capital is the key to growth. By utilizing factoring and reducing your accounts receivable overhead, your company has immediate capital and a cost-saving benefit.
Working with an international trade finance company allows you to retain equity in your company. Rather than seeking capital investors for portions of equity in your company, pursuing the factoring route provides fast funding and allows for better control of your company’s finances. This financial method also minimizes the need for loans, thus reducing your debts and increasing your outlook to investors or banks.
Is Factoring Flexible and Scalable?
The short answer is yes. When it comes to factoring, a business owner can decide to factor all their invoices in a given month or choose to factor zero invoices the very next month. If quick cash is suddenly needed to cover investing in a new opportunity, buying inventory, or even to cover a short payroll, factoring is the most flexible and scalable method toward getting these business funds fast. As your business grows, the number of invoices you have will also grow. The more your invoices grow, the more funds you can get for them if you decide to factor.
Is Factoring Right for Your Company?
If your company is looking to decrease its accounts receivable overhead, or reinvest capital, then factoring can be a beneficial option as opposed to traditional methods.
Tradewind Finance can help with more than just factoring. Tradewind can also provide full supply chain finance for your company and will work with you to create a tailored financial strategy that fits your company’s needs.