Cash flow is the basic need for every business and this is the fact that factoring is the most approachable option for many. Raising funds is never a cup of tea for everyone. It requires equal skills along with better future strategies to build a strong idea on it.
What is Factoring?
It is the process under which a business sells its invoices to financial institutions (the factor) at a discount for immediate cash. It is one of the best ways to raise your business finances in a short time period.
Traditional loans are not convenient for every kind of business and that is the time when factoring comes in and saves your business.
Process and Benefits of Factoring
There are certain factors that banks and other lenders take into consideration and you should always go prepared. So, here is the list of things that you need before contacting your bank or lender.
- Financial strength
- Business nature
- Clientele and accounts receivables aging report and other support factors related to the business.
Keep in mind that these are the crucial factors and should never be taken for granted when applying for factoring.
There are some other things that you need to know and that is the process. At the first step, the SME will sell its products or services to its customers and issue an invoice, which will involve a typical sales credit terms that the SME grants to its clients. The second step, the fact will command the customer’s credit rating after revising it. Third, the SME will send the factor a copy of its statements which will be confirmed by the factor with the client. Fourth, the factor will loan 75-80% of the value of the accounts to the SME and hold 20-25% in spare. Fifth, the factor will gather expenditures on the invoices from the customer. Finally, the factor will return the residual 20-25% of the payment to the SME, after taking about 1-4% in fees.
Advantages of Factoring
The main advantage of factoring is that it gives more time and finances to the SMEs to focus on their growth and progress. Though, there are many other benefits too.
Quick Cash Flow: Factoring provides SMEs with instant cash flow to let growth happen and fulfill obligations towards their business. They will also be able to go after opportunities such as purchasing surplus bonds in order to develop their business.
Debt Collection: Meanwhile the factor purchases the accounts receivable from the SME, it manages the debt collection process for expenses that are payable This means that the factor will be accountable for credit checks on clienteles and other debt collection exertions. It decreases collection budgets for the SME.
Debt Avoidance: factoring is not a loan which means that SMEs will not be taking on additional debt burden.
Moreover, there are some risks too while opting for factoring. The main risk of factoring in Singapore is that the fess of factoring could add up and it might turn out to be more expensive than other loans. However, your business needs the right choice at the right time.