Who uses factoring services?
Any business that invoices customers for payment can use factoring services. It is a significant source of financing for many companies that depend on fast billing turnaround, such as hardware stores, pharmacies, dry cleaners, florists, and wine and liquor distributors. Service industries such as temp agencies, security guard services, and trucking companies also use factoring services to meet payroll deadlines or simply improve cash flow as needed.
Factoring is also a valuable resource for businesses like garment companies and textile businesses that traditionally have a hard time securing loans. By factoring their accounts receivable, they can purchase 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. But 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. You may want to consider a small business loan or low-interest credit card if you have less than $5,000 in monthly invoice value.
Benefits of factoring
- Simpler administration. Factoring features less paperwork than loans and no credit or reference checks of your business.
- Potentially more available cash. The amount you can factor is based on the total value of invoices, not by collateral or credit history.
- Easier to get funded. Factoring services are more concerned with your clients' credit history than your company's. Also, factoring services is a great option for startups that rely on quick availability of funds to keep business afloat.
Drawbacks of factoring
- More expensive. You typically pay more for use of the money for 30 days than you would for a short-term business loan.
- More time-sensitive. If you have invoices that have gone unpaid for 90 days or longer, a factor may not take on the risk, or could offer a much smaller advance on the invoices.
- Could harm business relationships. Dedicated clients may view factoring as intrusive since the factor will call and send letters to indicate their accounts were sold. Also, factors want their money right away and may require clients to pay sooner than they are used to.