Why Do Businesses Use Factoring Companies?
In a nutshell, factoring helps businesses deal with slow-paying clients. Thanks to Sacramento factoring companies, businesses no longer have to wait months before getting paid by their customers. Factoring of their invoices allows businesses access to cash that they can use to run their processes. Businesses use the funds that they receive from factoring companies to:
- Pay suppliers
- Pay employees
- Build inventory
- Cover tax expenses
- Start new projects
Why use factoring companies?
Businesses benefit immensely from working with factoring companies. Here are some of the different ways in which they benefit:
- Improved cash flow
Customers who pay their debts slowly can cause various business processes to slow down. This often creates persistent cash flow problems for the businesses. These problems tend to get worse if the business is growing quickly.
Working with factoring companies improves cash flow. This provides businesses with immediate funds and this liquidity allows them to meet payroll and cover other expenses.
- May be used by startups and small companies
Smaller companies or those that are just starting out don’t have the traditional financing options that are available for larger companies. So when they have cash flow problems, they have an alternative.
It’s very easy for these businesses to qualify for invoice factoring. Both small and startups with great clients often get funded.
- Turnaround situations
Getting funding while trying to turn around a troubled business is a major challenge for the owner. Usually, their financial statements don’t look good enough to get bank financing at this time when they need the funds the most.
Factoring companies help these businesses that are going through a turnaround. This enables them to improve and become profitable again.
- Great for businesses that don’t qualify for a loan/line or credit
Loans lines of credit are the cheapest form of financing available for most businesses. And, in most cases, they are the best solution for most businesses. However, these financing options are available for businesses that have a good track record and solid financials.
Getting conventional bank financing is difficult. Factoring companies are a great option for businesses that can’t get conventional financing. The qualification requirements are so simple.
- Suitable for businesses with less-than-perfect credit
Most lenders only provide financing to businesses whose owners have good personal credit. This practice leaves so many people out. On the other hand, factoring companies focus more on the quality of the business as opposed to the owner’s credit. Businesses whose owners have “less-than-perfect” credit can qualify for factoring.
Factoring companies finance slow-paying invoices from commercial customers. Business owners don’t have to wait 60 days or more to get paid – the factor pays immediately. This financing provides the business owners with enough funds to run their processes and ensure that everything is flowing well.
The factoring company settles the transactions when the customers have paid the invoice in full. Most transactions are made in two instalment payments. The first is deposited as soon as the client gets invoiced.