Business owners might not be aware that they can sell their outstanding invoices to a third-party factor and get access to money — that is not a loan.
If you’re running a business, we have a few facts about factoring and accounts receivable financing to help you get access to the money you need now.
What is Factoring?
When you have outstanding invoices, Nerd Wallet suggests using factoring to free up cash now. Factoring is not a loan. You work with a third-party “factor” that works out payment terms with your customer and handles collections for you.
How Factoring Works
Factoring allows you to sell unpaid invoices to a third party and receive a cash advance for a percentage of what your customer owes. As an example, a customer owes $100,000 and has 30 days to pay. You can sell the invoice to a factor for a three percent fee, which leaves $97,000. You can then take a cash advance of 80 percent, which is $77,600 that you can receive in a few days.
The benefit of factoring is the third-party handles collections and accounts receivable for you, which is not a new concept. Large, mid-sized and small companies use factoring regularly to collect money on invoices to free up thousands or even millions of dollars.
Is Factoring for You?
Factoring is worth looking into if you need capital now.
Factors will let you take out a cash advance based on the invoices that are outstanding. Like a bank, the factor looks at the creditworthiness of the customer with the outstanding invoice.
You can request your factor provide a cash advance on the outstanding invoices, and you receive your money in a few days. Typically, factors handling accounts receivable, like Momentum Capital Funding, might give an 80 percent cash advance. Factoring contracts generally are 12 months in duration and are renewable.