If you’re looking to finance your business without incurring debt, you should consider factoring. Not to be confused with accounts receivables, factoring offers an easy and effective way to raise capital. It involves selling unpaid invoices to a factoring company. Since it’s not a loan, you don’t have to repay the money acquired a factoring sale. To learn more about factoring and why it’s a smart way to finance your business, keep reading.
Why Factoring Is a Smart Way to Finance Your Business
High Advance Rate
While different factoring companies offer different advanced rates, you can typically expect an advance rate of 80% to 90% from most factoring companies. In other words, a factoring company will pay you 80% to 90% of your invoices’ face value. If you sell a batch of invoices with a cumulative total of $100,000, for example, a factoring company may purchase them for $80,000 to $100,000.
Fast Cash
You can also get cash more quickly with factoring than with other common business financing methods. While a conventional bank loan may take 30 to 90 days — sometimes even longer — factoring is often completed in just a few days. If you need cash now and don’t have the luxury up to three months, factoring might be the answer.
Eases the Burden of Collecting
With factoring, you don’t have to worry about collecting your business’s unpaid invoices. It’s frustrating when customers or clients don’t pay their bills on time. When a customer or client misses a payment deadline, you’ll have to reach out to him or her in an effort to collect. Factoring, however, eases this burden. After selling your business’s unpaid invoices, the factoring company will handle collections, meaning you can focus your time and attention on other tasks associated with running your business.
It’s Not a Form of Debt Financing
This alone should be reason enough to consider factoring as a way to finance your business. Factoring is neither a form of equity financing, nor is it a form of debt financing. It’s simply a financing method in which you sell some or all of your business’s unpaid invoices. You don’t have to use collateral to obtain money through factoring. At the same time, you won’t incur debt through factoring. You simply sell some or all of your business’s unpaid invoices.
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