If you are running a business, you would know that the term 'cash on hand' looks good only on paper and in reality it is always 'cash out of hand'. Finance, or rather lack of it is what cripples your business. This is where factoring can help finance your business.
When you sell your products to your customers, you have to make a sales credit invoice and then have to wait for 30 to 90 days to receive your money. This means that your money is stuck during that credit period. But you still have regular expenses to pay, like staff salaries, supplier's payments and other office expenses. A factoring company can therefore, 'buy' your credit invoice from you. They will then give you the invoice amount in 2 installments.
The 1st installment will be transferred to your account within 24 to 48 hours and could be upto 90% of your invoice amount. The balance amount will be transferred to your account when your customer pays the invoice amount on the due date, minus the factoring company's 'factoring fee'. This fee could be from 1.5% to 5% and will depend on a number of factors such as the number of credit days you have given to your customer, the credit rating of your customer as decided by the factoring company and the total value of invoices which you 'sell' to the factoring company.
For your business, this is a win-win situation. Firstly you get almost your entire invoice amount immediately even though you have sold on credit. This improves your cash flow immediately. This ready finance will now help you in paying off staff salaries, paying off suppliers on time and even help you in making bulk quantity purchases where you could get a special discount.
You can now even go in for bigger purchase orders, which previously would have seemed impossible due to financial constraints. This type of arrangement grows along with your business since the more invoices you 'sell' to the factoring company, the more money you receive immediately and the lower your rate of 'factoring fees'. This is even better than taking a bank loan where you would have to submit guarantors or collateral and also a lot of documents. You would anyway have to pay interest on that loan. A loan would also be a fixed amount and in case you required more, then it would be very difficult to arrange it again.
In choosing a factoring company, it is very important to conduct a cross check on them before engaging their services. Since most factoring companies also take care of your payment collections, it is important that they are courteous and efficient in collecting payment from your customers or you could spoil your relations with them. You should therefore not sign any long-term agreement with them. This could be beneficial if you are dissatisfied with their services and want to opt out from that arrangement. If the factoring company does well within your style of working and if your customers are happy with their functioning, then this service can guarantee faster expansion of your business.
Hence, factoring provides you instant and constant finance for your business and 'cash in hand' literally will mean 'cash in hand'.
