Factoring
How It Works —
Factoring gives you early access to large customer payments. A financier will advance you a smaller amount than you expect from a customer. Once the customer ultimately pays, the lender will keep a fee and return the rest to you.
Example —
You receive $40k today from the financier based on a customer account that expects to pay you $50k in 90 days. Once the customer ultimately pays, the financier will keep $40k to pay off the financing amount and keep a fee. Any remaining amount will be provided to you.
You Might Be A Fit If —
- You sell to other businesses or organizations.
- You wait for week or months for customers to pay.
- You have dependable customers that are likely to pay in full.
Why You Would Use This —
Having customer payments earlier helps fund operations.
There is no complicated loan agreement and funding can happen quickly to meet short-term cash crunches.
You only send invoices you want to finance which gives you control over how much funding you take on.
Good for early-stage and businesses that have difficulty accessing other funding options because the financier is basing their decisions on who your customers are and not your business history or cash balance.
What TO WATCH OUT FOR —
If the customer doesn’t pay, the business may be held responsible for making sure that the capital gets paid back to the financier.
Non-recourse factoring agreements can shift the risk to the financier if the customer does not pay.
The fees associated with factoring can be quite expensive if used on every customer invoice.
You only have to finance the invoices that you choose to send to the capital provider.
