Businesses both big and small need revenue to pay all sorts of things, from employee wages and salaries to paying back loans to fuel, energy, and other resources needed to keep the business going. Sending invoices is the standard way to collect payments from customers, but often, these payments may be 30 to 60 days away or even longer, and sometimes, a company is unwilling or unable to wait that long, so there is another business model to handle this: factoring. Businesses such as shipping and freight, often with trucks, can make good use of factoring, and not necessarily as a last ditch effort, either. After all, small businesses, those with 500 or fewer employees, make up 99.7% of all business in the United States, and many of them can get a boost with factoring. Invoice funding can be made fast and reliable this way, and an international factoring association can coordinate and regulate factoring work around the globe.
What is a Factoring Company?
A business involved with the international factoring association is probably a factoring company. They often carry out small business factoring by acting as go betweens for a client company and paying customers, and make a profit from what they provide for those clients.
When a company, such as a small delivery company, carries out a service for customers, it generates an invoice to that customer, a paper form describing the debts owed, and for what services. However, the customer may take a lot of time to pay, so to speed things up, business invoice factoring begins. A factoring company purchases the right to collect on the customer’s invoice rather than the client company collecting it, and in return, the factoring company pays the client company’s invoice total at a discount, often 2% or 6%, according to Entrepreneur . The factoring company will usually pay around 70% to 80% of the invoice’s value right away, and aside from the discounted amount, and once the customer does pay, the factoring company pays whatever is left )aside from the discount) to the client company. In short, the factoring company pays most of the invoice’s value to the client but gets the invoice’s total value later, and the client gets a little under the invoice’s total but gets the money much faster. A company working under the international factoring association can make good deals with client companies to benefit both.
What is more, the factoring company will care about the credit and reliability of not the client company, but the customers themselves, since they are the ones who owe a debt that everyone is waiting for them to pay. This is not a new concept, either; factoring as a business has existed for many hundreds, or even thousands of years. Small business invoice factoring makes profits slightly smaller but faster for the client, and this can be essential if the client has time-sensitive expenses such as truck gas and maintenance, employees to pay, or taxes to pay to the federal government. Transportation factoring can be very useful for a client who is rapidly expanding and cannot easily afford to slow down while waiting for customers to pay an invoice a month or two later. In some ways, the relationship between a factoring company and the client is like a loan, although there are some differences to take note of. The discount that the factoring company gets for buying the invoice rights, for example, can act as a sort of interest rate for the client company to pay.