Factoring helps small businesses get working capital by selling accounts receivable, or invoices, to a commercial financial company known as a “factor.” The goal is for your business to receive cash more quickly than waiting for customer payments.
Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.
Factoring is not a business loan – it’s the sale of an asset (the invoice). Essentially, the factor is purchasing the right to collect on an invoice when it’s paid, minus a discount of 2 to 6%. The factor will pay around 75% of the invoice up front, followed by the remainder once they’ve collected on the invoice.
Because factors are counting on your customers paying their invoices, they are more concerned with your customers’ financial status. Factoring companies will collect directly from your customers and may require you to validate your customers’ payment history. If your business has creditworthy customers, factoring could help your business get working capital up front.
The key benefit of factoring is receiving quick boost in working capital, as many factoring companies will pay for your invoices within 24 hours. Since factoring is not a loan, you do not assume debt for the money you receive.
Factoring is generally a short-term solution, however. Giving up a percentage of your profits is not always the best way to sustain or grow your business. Unlike a line of credit, business factoring provides you working capital at one time, not ongoing access to the funding you need.
Spartan provides lines of credit that you can draw from in any amount, whenever you need it. The security of working capital at your disposal can provide a more long-term solution as your business continues to grow.