In this article:
- What is a factoring company?
- What industries use factoring?
- The advantages and disadvantages of working with a factoring company
What is a factoring company?
A factoring company is a company that provides invoice factoring services to businesses that require a non debt solution to their cash flow problems. The factoring company buys unpaid invoices from a business for a fee and the invoice is paid on maturity to the factoring company.
The factoring company buys invoices from businesses that require funding to help with cash flow and the business will receive around 90% of the invoices value in cash immediately. Once the full amount of the invoice is paid on maturity to the factoring company the business will receive the rest of its value minus the factors fee.
What industries use factoring?
Invoice factoring can be used by any industry that sells products or services to another company but in particular industries that suffer cash flow problems due to the nature of their business.
Industries that experience high production costs, seasonal sales slow downs, slow paying clients, experience unexpected growth and other unpredictable costs affecting their day to day operational cash flow use factoring as a non debt solution to their cash flow problems.
These industries will include manufacturing, construction and service industries, trucking companies and staffing agencies.
What are the advantages and disadvantages of working with a factoring company?
Advantages of working with a factoring company
- Improved and shortened cash flow cycle
- Peace of mind - get cash from invoices paid quickly
- A quick and easy way of obtaining finance
- No need for collateral
- No debt incurred as factoring is a sale not a loan
- Valuable client analysis, the factor credit checks customers providing the business with valuable information leading to better future business decisions and relationships
Disadvantages of working with a factoring company
- Reduced profit as there is a fee incurred on the value of the invoices
- Finance received on the invoices value is dependent on the credit worthiness of the customer
- Possible liability for unpaid invoices
- Factoring company contact customers for payment of invoice, this may affect customer relations
- More expensive than other forms of finance