One of the reasons why businesses may be hesitant to use factoring firms is due to not fully understanding how they operate and how they make their money.
It often seems too good to be true that a company will be able to provide up to 80% or more of the face value of some or all of your accounts receivable and will provide the cash within days. It also may seem difficult to understand how these companies can continue to operate and provide full management of the accounts they own with the small percentage of a fee they charge for the service.
Factoring firms work with all types of businesses. Some focus on businesses that are defined as small businesses, typically having a lower annual revenue as defined by the individual factor. Others work exclusively with large companies with millions of dollars in revenue.
The Process
All factoring firms operate in a similar way. A business owner applies to the factor for service. This is typically a very short form, completed online, and lets the factor know very basic information about the business and the customer base.
Once approved, which can be completed in 24 hours or less, the business then provides the factor with the accounts receivable they wish to factor. The factor then transfers funds into the account of the business. This will usually be approximately 80-90% of the value of the accounts receivable.
The factor then works with the business’s clients to collect on the invoices the factor holds. Once the customer pays the invoice, the factor then deducts the fees from the held 10-20% as per the agreement.
The factor wires the residual amount to the business. With top factors, the program offers low rates, no additional fees and the flexibility to help business cash flow as needed and to the best interests of the business.
