What Is Factoring Finance and How To Use It?

You may be prospecting for your business growth where your plans and other involved stakeholders are ready, but your balance sheet doesn’t allow. At the same time, your accounts receivable may have tied up a lot of money. In this case, you need to access the funds via factoring.

What is factoring finance?

In simple terms, factoring finance is a technique used by businesses to fund their cash flows, where they sell invoices to third parties at discounted rates. Factoring is ideal for small and medium businesses that lack well-established banking records, especially with huge lenders. Factoring, therefore, relieves the first party the burden for debts and enables them to have the required working capital so that they can continue trading as usual. When it comes to financial circles, they say that banks only offer financial services when people don’t need them. This is because financial institutions use a line-based model for undertaking their operations, depending on how your business performs and its current asset value. Factoring is an alternative solution for businesses to access funds tied up in their accounts receivable. Your factoring company will then buy the outstanding advances and invoices to 85% of the total value.

How it works

  1. Invoices into cash

Here, your business will provide goods to creditworthy clients only where a period of 30-90 days is required for the invoice to be paid to maintain positive cash flow. The unpaid invoices will be paid then sold to the factoring company and receive an immediate payment of about 90%. After receiving your application, the factoring company will review it in one day.

  1. Verification

Next, the factoring company will perform a due diligence check and then verify your invoices. This process will take about 3 to 5 working days. The due diligence will majorly focus on checking judgment search, commercial code liens, tax lien search, among other corporate searches.

  1. Same day cash

After completion of searches, the funding starts immediately. Here, the factoring company will have received and verified the invoices. Funding is done within 24 hours.

  1. Balance received

The clients will make payments directly to the third party company with respect to the agreed invoice terms. After receiving the payments, the factoring company will provide the amount remaining less their charges or fees.

In conclusion, these are the steps on how factoring finance solution works. The factoring company will also manage credit control, which will save a lot of your time.