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As important as it is for a business to focus on the bigger picture and its long-term plans, a healthy cash flow is equally important for it to survive, thrive, and expand.
Sometimes, a business can have orders lined up, and invoices to be collected, but the waiting period of 60 to 90 days before payment is made can pose a challenge in terms of cash flow. This can be particularly critical when there is a pressing need for cash due to expansion plans or for making payments to one’s own suppliers.
In such cases, where cash is needed immediately, there is an option a business can avail to manage the situation. It is called finance factoring.
What Is Factoring?
Factoring is a form of financing where a business is able to collect its invoices in advance from a factoring firm, thus getting immediate working capital, instead of having to wait for 2 to 3 months for customers to pay.
Factoring is particularly suited to businesses that have considerably long net terms but have current, ongoing expenses related to operations, expansion, and the like.
How Does Finance Factoring Work?
If you are considering factoring as a means of financing your business, then you need to know the factoring process.
The experts at the Mountain Valley Consulting Group are trained in all aspects of the factoring process and can walk you through each of the following steps:
- Finding the right factoring company: Factoring companies tend to specialize in different industries. To get the best service, it is best to go for a factoring company that specializes in your industry. Be sure to check how long the factoring companies have been in the business and have a look at their customer reviews so you know you are going with a good, professional firm.
- Applying at the chosen factoring company: There is an application process you need to follow. Your application will be used by the factor to assess if you are a good fit for them or not.
- Approval and terms and conditions: If the factoring company finds everything in order, they will send you a contract detailing the terms, which are likely to include the advance rate (1st installment), factoring rate, and net term.
- Account setup: Once you sign the contract, your account is set up with the factoring company and this is when the factoring company will send a notice to all your customers about the way that invoicing will now happen.
- Funding Invoices: Once this initial process is done, then the factoring company funds invoices within a day of the transaction happening. They pay the first installment when the transaction is made and settle the transaction- minus their fee- once the customer makes full payment.
Accounts Receivables Financing, Invoice Factoring, And Contract Financing, Explained
People often tend to use account receivable financing and invoice factoring interchangeably and many confuse contract financing with the other two as well.
However, while they are very similar, the three of them are not the same. Here is how each form of factoring is defined:
- Accounts Receivable Financing/Factoring: An accounts receivable finance service gives a business an advance loan on its invoices. The business effectively submits its invoices with the factoring company as collateral. The responsibility of collecting payment stays with the business and they have to deal with the impact of failed payments. Due to this collateral, the liability taken on by the factoring company is reduced, which makes this a cheaper service when compared with invoice factoring. This is also called recourse factoring: where advance payment is made against the invoices submitted as collateral.
- Invoice Factoring: In invoice factoring, the factor takes complete ownership of the invoice, which means it takes full responsibility for collecting payment from the customer. Due to the higher level of liability, invoice factoring is the more expensive service. This is also called non-recourse factoring where the invoices are purchased by the factoring firm and it is liable for dealing with failed payments as well.
- Contract Financing: Contract financing also involves getting an advance against what a business will earn but unlike in the other two cases, contract financing allows you to cash in advance for work you have not yet done. There is only a contractual agreement between you and the customer. In contract financing, the agreement will focus on stipulations about payments made at different stages of work completed. Principally, contract financing works the same way as accounts receivables in that most of the advance on invoice is paid immediately, with the balance minus the fee is paid on settlement of the transaction.
Advantages Of Factoring
Whichever type of finance factoring you consider, you might still wonder what advantages there are of factoring compared to other financing options such as a traditional bank loan. Here are some of the most prominent advantages of factoring:
- Improves cash flow: First and foremost, the immediate injection of cash is a huge advantage factoring offers, particularly when your need for cash is a pressing one and waiting for the 60 or 90 days for your customers to pay is not an option. And by getting a lump sum payment up ahead, the business is freed up from dealing with the strain that comes from late payments.
- Builds a strong credit profile: This advantage is particularly relevant for younger businesses coming up and needing a strong credit rating for their future pursuits. As long as the business maintains a strong payment record with the factoring company, the company can report to the credit agency and this can gradually improve its credit rating.
- Facilitates pursuit of market opportunities: The dynamic market conditions of today mean that many times market opportunities crop up suddenly, which means cash is needed urgently if one is to benefit from them. For example, a heavy piece of equipment being sold at a bargain price is an opportunity you don’t want to miss and neither is the chance to buy in bulk and get additional steep discounts. There are many more similar opportunities that can be capitalized on because of factoring as it makes cash available at very short notice.
- Helps companies survive periods of downturns: Whether it is tough economic conditions in the market or harder financial conditions specific to the firm, sometimes help is needed, which traditional banks are not willing to give. Factoring firms tend to remain strong in providing support even in those tougher times, which allows a business to get through those periods.
Why Use the Mountain Valley Consulting Group?
If you think factoring might be the right finance factoring option for your given situation, then the first step is finding the right factoring company for the job. This is where the Mountain Valley Consulting Group can help. Here’s why:
- Experience: We have been in the business for over 40 years and have seen it all. We know what works and what doesn’t. We have a proven track record of success and can be the go-to company for all your needs. With us, you can therefore feel safe in knowing that we will be able to deal with your situation, regardless of how complex it may be.
- Comprehensive services: We offer a comprehensive range of factoring services. So, whatever your factoring needs, we are more than capable of helping you with it.
- Best rates in the market: We offer some of the best rates in the market to businesses, making sure they get the most value from this financing option.
- Positive customer reviews: Look up what businesses that have worked with us have to say about us. You will find a plethora of positive reviews, strongly reiterating our promise of delivering the best possible service unique to each business’s situation.
For all these reasons and more, do not hesitate to consider us for your financing needs. We will be more than happy to help and guide you through the process. And we assure you that you will be more than happy with the quality of service you receive and the timely, generous, cash injection you get.