Right Deals for the Proper Factoring Companies

As companies grow, they often need larger amounts of cash to finance their day-to-day operations. Even if these companies are profitable, they may not be able to close the gap created in the cash flow between the time they pay their obligations and the time their customers make their payments.

Small Business

This is a great challenge for small businesses, since they do not have a great purchasing power over their suppliers, which require them to pay in less than 30 days. They also lack decision-making power over their clients, which can delay their payments for more than 30 days. The difference between the days from when you pay your business bills until your customers pay you is called “working capital financing deficit.” What can you do as a small business owner to close this gap and prevent your business from suffering from a lack of cash flow? You have two options: open a line of credit or resort to a factoring company. In this post we will explain what each one of these options consists of, as well as its advantages and disadvantages. With the Commission express you will be having the perfect deals.

Traditional financing: Line of Credit

The traditional way to close the gap is to obtain a line of credit (LDC) from a bank. The LDC are essentially credit cards backed by the assets of the company that the LDC requests. The more active you have, the higher the LDC you can get. Unlike credit cards, the company can withdraw cash from your account and interest will be charged on the outstanding balance.

  • In turn, they must pay a periodic fee, usually less than the interest rate, and based on the unused balance of the LDC. The challenge of getting an LDC is the bank application process. A typical process takes more than two months and entails that the business owner invests a lot of time and effort in the preparation.
  • Factoring companies are companies that have the backing of private investors; therefore, most are not regulated and have a more independent character. Instead of using your assets as collateral, factoring companies buy accounts receivable and pay you normally between 70% and 90% of the unpaid balance. The factoring companies retain the remaining balance as a reserve, until the clients pay their bills.
  • Factoring companies charge fees that range between 1% and 6% of total invoices (that percentage is the discount). Some of the benefits of factoring are the following: they provide money immediately for the value of the invoices that you still have to charge, the application process is faster and simpler than in a bank, they collect the invoices in your name (which saves you a lot of time), and the factoring companies they ensure the risk of not receiving bill payments.

Many small business owners think it is worth paying a fee in exchange for those “value-added” services. Factoring is usually more expensive than an LDC. A discount of 2% on an invoice that is due in 30 days is equivalent to a 24% annual percentage rate (TPA) (2% X 12 months) and the factoring companies ensure the risk of not receiving bill payments.

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