How to Use Factoring for Cash Flow

Companies facing a cash-flow squeeze and slow-paying customers often sell their invoices or accounts receivable to specialized companies called factors. The factor advances most of the invoice amount — usually 70% to 90% — after checking out the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.

Companies that use factoring like it because they get money quickly rather than waiting the usual 30 or 60 days for payment. After sending an invoice to a factoring firm, a business can have money in its hands within 24 to 48 hours.

Some businesses use factoring to get started. Whereas banks focus on a business’s creditworthiness in considering whether to make a loan, factors look at the financial soundness of a business’s customers. As a result, firms with scant credit history may be able to sell their invoices.

But the service can be costly — several percentage points more than a conventional lender. It was once a controversial source of financing because of its ties to financially fragile companies in the garment industry. A related commonly held impression is that a company uses a factor because it isn’t credit-worthy enough to deal with a bank.

Now billions of dollars in accounts receivable flow through factors each year, many of whom specialize in particular industries such as trucking, construction or health care. Some companies use it to meet cash-flow needs as a stop-gap measure. Others prefer factoring to banks, which often require more paperwork, or other outside investors, who may want a piece of the business.

Companies facing a cash-flow squeeze and slow-paying customers often sell their invoices or accounts receivable to specialized companies called factors. The factor advances most of the invoice amount — usually 70% to 90% — after checking out the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.

Companies that use factoring like it because they get money quickly rather than waiting the usual 30 or 60 days for payment. After sending an invoice to a factoring firm, a business can have money in its hands within 24 to 48 hours.

Some businesses use factoring to get started. Whereas banks focus on a business’s creditworthiness in considering whether to make a loan, factors look at the financial soundness of a business’s customers. As a result, firms with scant credit history may be able to sell their invoices.

But the service can be costly — several percentage points more than a conventional lender. It was once a controversial source of financing because of its ties to financially fragile companies in the garment industry. A related commonly held impression is that a company uses a factor because it isn’t credit-worthy enough to deal with a bank.

Now billions of dollars in accounts receivable flow through factors each year, many of whom specialize in particular industries such as trucking, construction or health care. Some companies use it to meet cash-flow needs as a stop-gap measure. Others prefer factoring to banks, which often require more paperwork, or other outside investors, who may want a piece of the business.

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Pavestone takes pride in its ability to rapidly process factoring requests, from application to final funding. Many times a decision will be made to fund a business within 48 hours.

Please get in touch to find out how we can work together to help you achieve your goals. Our friendly factoring experts will answer your questions and can provide further information on our services and products.

Use the handy email form or give us a call at 855 621-3996 during normal business hours and find out first hand why our motto is "We can make this happen"!

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