 Factoring services can be used by any business that invoices customers for payment. Many companies can use this. Those can be hardware stores, drugstores, dry cleaners, florists, and wine and liquor distributors. Such service industries as temp agencies, security guard services, and trucking companies also use factoring services. It helps them to meet payroll deadlines, also if it is needed to improve cash flow.
Such businesses like garment companies and textile businesses that traditionally have a hard time securing loans, also find it a useful resource. Factoring allows them to buy raw materials or make other investments to grow their businesses.
The typical factoring service candidate has $5 million to $10 million in annual sales and $25,000 to $100,000 in accounts receivable every 30 to 60 days. However, most factors will work with any company meeting a monthly minimum of $5,000 to $10,000 in invoices.
Businesses with less than $5,000 in accounts receivable may find a factor willing to work with them, but are likely to have to pay more for their services. If you have less than $5,000 in monthly invoice value you may want to think over a small business loan or low-interest credit card.
Profits of factoring
1. Simpler administration. Factoring outlines less paperwork than loans and no credit or reference checks of your business.
2. Potentially more available cash. You can factor the amount. But it is based on the total value of invoices, not by collateral or credit history.
3. Easier to get funded. Factoring services is a great alternative for startups. They depend on quick availability of funds for keeping business afloat. These services are more concerned with your clients' credit history than your company's.
Disadvantages of factoring
1. More expensive. You pay more for use of the money for 30 days than you would for a short-term business loan.
2. More time-sensitive. A factor may not take on the risk, or could offer a much smaller advance on the invoices. This is possible in case you have invoices that have gone unpaid for 90 days or longer.
3. Could damage business relationships. Dedicated clients may view factoring as importunate since the factor will call and send letters to indicate their accounts were sold. Moreover, factors want their money right away. They also may require clients to pay sooner than they are used to.
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