What is factoring?
Factoring is a service that can be used by entrepreneurs who are waiting to be paid by a counterparty, provided that the due date has not yet passed. How does it work?
EXAMPLE
Ms. Malwina runs a stationery store. Due to the demand for teaching aids, several nearby schools have purchased a lot of goods from her, but the payment term for each of these transactions is 60 days. With factoring, Ms. Malwina can get her money back faster, which will help her pay off her company’s obligations and/or purchase new goods.
The above example is an abbreviated description of a situation in which Ms. Malwina (in this case, we will call her a factor, i.e. a person who uses a factoring service) sells an invoice to a factoring company (called a factor). The factor almost immediately pays the company the amount owed less the commission. Usually the entire procedure takes a few hours, but in some cases it may take a little longer.
Other services
Factoring companies do not just purchase invoices – they also offer a range of additional services, such as verification of counterparties and monitoring of receivables.
These services-although they involve additional costs-carry tangible benefits for the customer. In the full package, the factor pays the client the money, and later handles the collection of payments from the debtor himself. This allows the factoring company to forget about the receivable when it receives the funds.
How is factoring different from credit?
The main difference separating factoring and credit, are the conditions for receiving them. Banks that provide loans often impose rather restrictive requirements on companies, so that companies that are recently established or that do not meet financial requirements cannot count on this method of financing.
Quick loans or instant loans, on the other hand, are a solution that places almost no requirements on businesses in need of financing. In this case, lenders take on more risk (due to cursory verification or even lack thereof), which is reflected in the proposed rates.
Factoring has the advantage that the counterparty, not the factor, is verified. So if a small company, even one that has been established recently, is working with large and reliable companies, it should have no problem obtaining this type of financing.
Factoring for small businesses
The characteristics of factoring make this service an exceptionally popular choice for companies especially in the SME sector. Small businesses benefit from the fact that factoring (also known as micro-factoring) is a fast, efficient and, above all, a way of raising capital that does not require the submission of complicated documentation to the financing institution.
When should small business owners use factoring?
- when a company does not meet the conditions for a loan from a bank – for example, because it has been in business for too short a period;
- when a small business wants to grow – funds to hire a valuable employee, train or purchase new technology – opportunities like this do not come along often. If you are expecting to be paid during this time, the sale of one or more invoices is enough to raise the needed financing;
- when it is necessary to make ongoing repairs – equipment or machinery needed to run a business can break down, not infrequently just after the warranty period has expired. Instead of stopping production and losing money, you can quickly sell the invoice to regain capacity and get back on track;
- when a company has temporary financial problems – seasonality, dishonest contractors, unforeseen market conditions – are just a few of the possible causes of financial problems for small businesses. Factoring allows you to quickly regain liquidity and get back to doing business.
How to use factoring?
It’s easy and requires few formalities – fill out an online application on our website and regain full control over your company’s liquidity. Online factoring is a solution thanks to which you can quickly gain cash for the development of your business – wherever you are now – without leaving your home, office, or the cabin of your car!
