Factoring can be a useful tool for companies looking to improve their working capital. In this blog we explain how factoring can be used to improve working capital.
What is factoring?
Factoring is a financial transaction in which a business sells its accounts receivable (invoices) to a third party (called a factor) in order to get cash quickly. The business gets an advance on invoices sold and the remainder of the invoice minus costs is transferred by the factor to the business when the invoice is actually paid. Alternatively, the business sells its invoices at a discount to the factor. This type of financing (factoring) can be a useful tool for businesses looking to improve their working capital.
What is work capital?
Working capital is the cash a business has available to meet its short-term obligations, such as paying bills and employees. A lack of working capital can put a strain on a business and make it difficult to meet these obligations on time. Factoring can help improve working capital by providing businesses with cash quickly, without having to wait for customers to pay their invoices.
The benefits of factoring
One of the main benefits of factoring is that it allows businesses to get paid for their invoices immediately, rather than having to wait the typical 30, 60, or 90 days for payment. This can be especially beneficial for businesses that are growing rapidly, as they may not have the cash flow to support their growth. By factoring their invoices, they can get the cash they need to invest in new inventory, equipment, or staff.
Factoring can also help businesses manage risk. When a business sells its invoices to a factor, the factor assumes the risk of non-payment. This can be especially beneficial for businesses that have customers with a history of paying late or not at all. By factoring their invoices, they can transfer this risk to the factor and focus on growing their business.
Factoring and accounts receivable management
In addition to improving working capital and managing risk, factoring can also be a useful tool for businesses looking to outsource their credit management and collection processes. When a business factors its invoices, most factors take on the responsibility of collecting payments from customers. This can be beneficial for small businesses that may not have the resources or expertise to effectively manage these processes.
However, not all businesses want to lose grip on their debtor management. After all, debtors are by nature also customers and payment behavior is usually a very good indicator of customer satisfaction. Therefore, as an entrepreneur, keeping in touch with your customers through the credit management processes may be preferable over outsourcing. It is therefore important for business to bear in mind what the factor’s policy on credit management and collection processes is.
Concluderend kan factoring een nuttig hulpmiddel zijn voor bedrijven die hun improve their working capital. By providing businesses with cash quickly, managing risk and helping with credit management and collection processes, factoring can help businesses grow and meet their short-term obligations.
