Companies looking to increase their cash flow often look to sell receivables to factoring companies, but there are advantages to this technique beyond merely freeing up cash. This blog takes an in-depth look at how factoring works and the motivations behind selling receivables.
Factoring, Explained
Factoring works in this manner: Factoring companies buy a client business’s unpaid invoices (the receivables) at a slight discount. In return, the client receives a cash advance equivalent to a large majority, often 80% to 85%, of the value of the invoices. Once the client business’s customer pays off the invoices, the client business receives the remaining percentage.
Factoring Makes for Speedy Cash Injections
Perhaps the top reason a company might sell receivables is to speed up the injection of cash it receives from goods it has already sold. Contracts often specify payment doesn’t need to occur for 30, 45, or even 60 days, creating a built-in gap between when a company spends resources on creating and selling a product, then receiving money for it. A sale of receivables, however, eliminates the gap.
Factoring Shields You from Customers
No business can thrive without customers, but unfortunately, some customers are slower to honor their commitments than others. Factoring can help your business recoup money even when slow-to-pay customers are in play.
Factoring Can Be a Short-Term Commitment
Many companies that sell receivables are looking to make it through a short-term rough patch. In such a case, factoring is an ideal solution, especially compared to products like loans, which can bog a company down in years-long repayment schedules.
The Receivables Are the Asset
Another reason a company might sell receivables is that this financing method doesn’t require additional collateral. The receivables themselves are enough of an asset for the factoring company, keeping the client business’s equity and other property out of the deal.
Want to find financing arrangements suitable for your business’s individual needs? Talk to Critical Capital Solutions today.
