Factoring is an easy and convenient way for businesses to improve cash flow, expand the business, or purchase new equipment. The process is faster than a traditional bank loan and there are no interests rate to pay. Factoring can be done as a one-time transaction, or as an ongoing arrangement. Compare factoring companies because options and fees vary. Small business owners will want to find one that specializes in factoring for small businesses to get the best deals.
One of the most common type of Factoring resources available to businesses is invoice factoring. This involves no credit check of the business. The lender conducts credit checks on the customers who have already received the service or product. The lender pays the business cash in exchange for invoices.
Once the invoice is paid in full, the lender takes a fee and returns the remainder of the money. The original payout ranges anywhere from eighty to ninety-six percent of the face value. Fees are typically one to three percent of the total amount of invoices, depending on the lender.
Other Types of Factoring
This works the same way invoice factoring does. The difference is an actual invoice is not required. This is an ideal option for businesses that accept credit card payments or keep track of what is owed via a ledger.
Spot factoring involves one large invoice. Developers, contractors, and construction company owners will often select this type for a one-time transaction. The payout percentage tends to be larger because the risk is lower.
A construction company, for example, has a contract to build an apartment complex. The company will need cash to cover supplies, hire more workers, and upgrade equipment. The upfront cash from the factoring lender ensures expenses can be met for the duration of the project.
Freight bill factoring operates similarly to spot factoring. Once a load is delivered to the final destination, the company is paid by the lender. This allows small and new trucking companies the opportunity to get ready for the next job without having to wait for payment in thirty to ninety days. Some established trucking companies also rely on this factoring to keep up with maintenance, fuel bills, and payroll.