General Blog

Introduction

Starting a new business can be difficult. Coming up with the underlying cash needed to get your footing in the market can be difficult. This is especially so for those types of industries that have a ton of ‘front loading.’ Front-loading being a large bill upfront to purchase the supplies needed to complete the work. Construction is one of these types of industries. Basically anything in real estate requires a large upfront amount of money to get started. This is where factoring can come in.

What is a Factoring Company?

Factoring is when you sell your business assets to a third party company for the cash. However, you don’t exactly ‘sell’ the assets. Because you get to keep them. It’s almost like a different form of refinancing the assets to utilize the money value that they are worth. It is a quick way to get cash to get started upfront in business. Another way to factor a business is to sell the accounts receivable. So basically, you sell all of your profits to a third party company for the initial upfront money. So they wait for the money that you have promised with invoices. That way you can get the initial cash that you need to keep the business moving forward. It is a common tactic that companies utilize.

What are the Benefits of it?

The obvious benefit of factoring is that you get the needed cash upfront. So you don’t have to wait on your cash to come in. That way you can purchase the supplies or pay the paychecks needed before you actually get the money for the work you are doing.

Industries such as construction usually have a large upfront cost to start the work. Then get paid in large chunks of money after the work is done. But there are still expenses that have to be taken care of in between. So factoring helps relieve that financial stress. Overall that is what is a factoring company explained.

Are there any Cons?

As with any financial decision, there are sometimes cons that go along with that decision. This situation is no different. The major con is that sometimes there is interest involved. Which takes away a little of the profit. The other con is that if you fail to pay back the money then you are liable and so is whatever profit or product you had to utilize in the factoring.

The other negative is that just because you have invoices doesn’t necessarily mean the money will come in. There are many other factors that go into that. So factoring is a fairly risky business to get into. So if the business runs into trouble they will have to find different areas to increase the overall cash flow. Which is oftentimes negative for the business. Such as laying off workers or increasing the number of projects being done.

What Types of Businesses Utilize Factoring?

There are a few major businesses that utilize factoring. Construction is the most common. But oilfield, agriculture and even law firms commonly utilize factoring. These are all businesses that typically don’t get a large payday until the work is done. So factoring is helpful to keep the business flowing over the course of waiting for that money.

Conclusion

At the end of the day, factoring is a simple way for businesses to get money upfront and keep the business flowing. It is basically when a business sells potential income to a third party company. It is very common in businesses that rely on a big payday after the work is done.