How Does Factoring Work?

We receive numerous inquiries asking how does Factoring works and is it right for your business.  Factoring is a fabulous tool for businesses that are starting up or have history but are just struggling with cash flow and have to turn away clients as they do not have sufficient cash available to meet payroll, purchase supplies or are just looking for extra cash to expand their business.  If you are a startup, many potential clients will want to know that you have sufficient cash flow to continue to provide service to them. Getting pre-approved to Factor your receivables is an easy way to ensure that your business has the cash you need to support your existing clientele and take on additional clients without the worry of whether or not you will have the cash you need when you need it.

Get paid early on your receivables

Depending on the client and industry, most invoices take an average of 45 to 60 days to collect.  Factoring allows you to sell these invoices to a lender who will advance you 80 to 90 % on the day you invoice for the service your business provided. You have sold your receivables and in the process purchased credit insurance on the risk of default of your client.  As a business owner, the critical decision you need to make is whether or not receiving 80 to 90% of an invoicing day one rather than 100% 45 days later allows you to invest that money back into your business allowing your business to grow substantially higher than the interest you pay by Factoring your receivables. The premise is that receiving a percentage of an invoice today is better than receiving all of it in 45 or 60 days.

So how does it work?

Like any financing tool, there is an application process. Most E-Commerce Marketing Factoring Lenders will want a simple application filled out, a list of your aged receivables that includes age, client details and amount and some details about your business. If it is a start-up, a simple list of clients and anticipated monthly invoicing will suffice. Lenders will want some details on your company even though the risk is really your client base.  This is primarily done to ensure that they are not doing business with a criminal. They will ask for a corporate resolution, a list of principals and will want to understand what your business does.  The majority of the focus will be on your clients through.

Receivables factoring approval

Once you have been approved and your clients have been approved to be factored, a separate bank account will be established that the Factoring company has rights over. This is where your clients will now send payments to. Note that all factoring companies will want to establish a separate bank account for collections,  but not all will demand that they perform collections. Many do allow you to continue to perform collections.

Your invoices now goes to the factoring company

After you have completed service to your client and you are sending an invoice to your client, that invoice will also go to the factoring company. They will advance you the agreed percentage amount within 24 hours for you to do with what you like. The invoice will then be collected, again by either you or the Factoring company. Upon receipt of the entire invoice amount, the Factoring company will deduct the amount they advanced you plus the interest owed on the advance and then send you the difference.  This process continues every time you have an invoice for an approved client.

Never worry again on not having cash to meet your business needs

This beneficial product allows you to never have to worry about whether or not you have the cash to meet your businesses needs and affords you the confidence to take on new clients knowing that the cash is there when needed. You can contact us anytime for a free evaluation of the best tools available to you to grow your business.

Bob Alexander

Bob Alexander is President of Alexander Financial Solutions, LLC. He is an expert in obtaining Financing and Working Capital for Business Owners. AFS provides all Asset and Cash Flow Lending. Bob has global experience and proven Leadership skills in Risk Mitigation, Balance Sheet Management , Process Improvements, People Development, Infrastructure Builds and maximizing profitability.
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