A Guide for Business Owners Considering Factoring

Business owners can find many ways to help ease cash flow and even take advantage of time-sensitive growth opportunities through alternative funding options like factoring. This process involves selling your outstanding invoices which have not fallen delinquent to a factor in exchange for a cash advance. You can factor your invoices for a small fraction of the amount, usually no more than five percent, and sometimes retain the ownership of your invoices throughout the process. There are qualifications to consider in this process as well as how to apply for and use the funds and how to pay it all back.

How To Qualify

To qualify for this financing option, you will need to have a business which deals in invoices such as the medical field, construction or custom manufacturing. You will want to make sure that you are not having reoccurring cash flow issues or using a factor can cause you to get stuck in an advance and debt cycle. The factor will usually not look at your creditworthiness, but rather the creditworthiness of your customers so it is a good idea to choose invoices in good standing.

How To Apply and Use

It can be easy to use and apply for factoring and most of it can be done online. You will need to submit some paperwork showing the current state of your books as well as your business financial history to get approved. You can then use this method by submitting invoices and going over the terms of the advance. The factor will then send you a percentage of the invoice amount, as outlined in the terms of the agreement, and you will have a payback period.

How To Pay it Back

Depending on the terms of the factor, you may retain ownership and collection duties for the submitted invoices and pay back the factor with interest when you get paid on those accounts. Some factors will buy the invoices from you, give you a partial advance and then collect on the accounts themselves. When the invoices are paid in full, the factor will send you the remainder of the balance minus any fees and interest outlined in the terms. Either way, this is a short-term lending method that you can use during dry times or even to get a jump on new projects.

As a business owner, you may find that the best way to temporarily increase your cash flow is factoring. This process involves using outstanding invoices, but not late ones, to secure a cash advance from a factor. These are relatively easy to apply for and pay back for temporary capital solutions.

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