When your business is a B2B (business to business) operation for products or services, it is very common for receivables to be paid on a 30, 60 or 90-day cycle. This is great for the buyer, but for the seller it can create a deficit in available cash while those invoices are outstanding. Through service business factoring a company can obtain access to those funds through factoring, resolving cash flow problems without the need for a bank loan.
The Cost
Many small business owners assume that service business factoring is actually a cost ineffective option for the business. However, this is not the case for most businesses if they actually sit down and consider the costs of failing to use factoring or going the route of a traditional bank loan.
With service business factoring the factor will provide you with a slightly discounted value of the accounts receivable, you choose to sell. This is a small percentage that is rarely over six percent and often closer to two. Then, the factor will hold a reserve and provide you with immediate access to cash on the balance, which can be as much as 80% of the total.At this time, the factor takes over managing the accounts receivable and collecting for the invoice. Once it is paid in full, the factor deducts their service business factoring fees and transfers any balance to your account from the reserve.
The fees, when compared to interest rates on loans over time, as well as the problem that many businesses don’t qualify for traditional loans, more than balance out the costs.
The Benefits
- There are several benefits to service business factoring that include:
- The ability to hire, make payroll, take on new business and meet all financial obligations
- Cash available without any liability against the business including no personal guarantees or encumbering of assets
- The factor will manage the accounts receivable, cutting down on the work for your office staff
- Offers a short-term cash flow solution without any risk to your business
If you are considering service business factoring, it is important to work with a factoring company that knows your industry and your business. It is also important to ensure the factor can provide the funding you need and can offer you factoring without the need to enter into a long-term contract for their services.
