Factoring, or accounts receivable financing, is a financial transaction in which a company sells its invoices to a third party or ‘factor’.
Generating revenue without financial assistance may not be doable for some companies. In that case, factoring is a great way to maintain financially healthy operations and sustain economic growth. A major timing imbalance exists in between when companies get paid and when they are expected to pay their various expenses. Thus, factoring is an effective alternative to cover that gap. Factoring allows companies to quickly build up their cash flow, pay employees and handle customer orders. Simultaneously, they can keep taking on more business.
Here are some of the ways factoring can help your company achieve significant growth.
Factoring is Cost-Effective
The costs associated with factoring are usually more reasonable than the alternatives like cash advances and equity. Moreover, unlike the latter, there is also minimal ownership dilution, and higher investor returns with factoring.
Factoring Quickly Accelerates Cash Flow
Factoring results in immediate liquidity, as opposed to waiting for several months for customer payments to come through. This allows your business to grow faster, as you can make investments earlier than usual.
Factoring Includes Payment Collection & Processing
In addition to financing, factoring takes up the task of collecting and processing expenses on invoices, and it also provides a collection report for all such expenditures. This step greatly reduces the overhead costs as well.
Factoring Incurs Minimal Debt
Factors perform the function of credit analysis. This includes checking and balancing all the customers, whether they are new or old. Consequentially, it enables the business to set the most suitable terms and limits to potentially risky customers, thereby reducing the risk of bad debt.
Additionally, factoring is not a loan, rather a purchase of receivables through a third party. Therefore, you can get all the benefits of a loan without having to put a bad mark on your balance sheet.
Factoring is Flexible
Factoring comes with an easy switch on and switch off option, depending on how often you pick and choose it as well as the invoices that you have to factor. You can choose to factor all your invoices in one month, and factor none the month after. If you need money to meet a payroll, buy inventory, or invest in a new opportunity, then the easiest, minimally-costing payment mode is factoring.
Factoring is Scalable
Factoring differs from traditional banking loans in the sense that the funds can grow with your business. This means that as you receive more invoices from your customers, your financing from factoring grows alongside them.
Factoring Is Effective at All Stages of Company Growth
Factoring is a great strategy for startup businesses with limited financial reserves who want to maintain a good balance sheet. In fact, companies that sustain themselves from factor-generated revenue during their startup phases continue to factor millions of dollars after they are well established and have gained enough financial security.
Tradewind is one of the best international factoring companies that provides tailored cash flow solutions for its global clients. Focused on the mid-market, Tradewind offers financing, credit protection, and collections for the world’s exporters and importers.