We understand that the world of finance is often a difficult one to navigate. This is never truer than when you are attempting to get a new business off the ground. Where do you start? What do you need to know? Plain and simple, factoring is one of the more effective ways in which people ease their business’ cash flow problems. While this may seem simple, it does get more complicated than just that. In fact, there are many different aspects of factoring that you will need to understand in order for you to comprehend its full scope. Not to mention, there is a lot of misinformation about factoring that is available to new business owners that only aids in confusing them and not much else. If you want to start from the ground and work your way up in the world of factoring, the following basics are a great place to start when you are launching a new business in Los Angeles.

What exactly is factoring?

Every business has issues with cash flow from time to time. Whether these are caused by your struggle for working capital or additional woes, this is where factoring can help. Basically, this process would begin with a factoring company buying your invoices, managing your sales and collecting any money that is owed to you by your customers. While this process may seem complicated, it isn’t at all. In fact, it is fairly simple, extremely efficient, and goes something like this:

  • When an invoice is raised by you, the factoring company will then purchase the debt that is owed by your client or customer to you.
  • A payment will be made to you as soon as possible that will be around 75 percent to 90 percent of the value of the initial invoice.
  • The full value of the invoice will then be collected from your client or customer.
  • The remaining balance will then be paid to you by the factoring company.
  • You will then only be responsible for paying the factoring company any interest and fees that have already been agreed upon.

What is a factoring company?

This brings us to an important point in our explanation. What exactly is a factoring company? Well, for one, our company, The Commercial Finance Group is a factoring company. Essentially, we collect invoices from a client and then forward them a percentage of the debt outlined in that invoice. When a business uses a factoring company, they are doing so they can be sure that they will be receiving cash they need to run their business much sooner than they would otherwise. Let’s take a look at an example to clear up any confusion.

Let’s say your business is owed $10,000 by a customer. You would sell the invoice to a factoring company for $9,000. The factoring company would then collect the 10,000 from the customer, and pay you the remaining 1,000 you are owed. You would then have to pay a smaller amount to the factoring company based off any fees or terms that had been agreed upon before the selling of the invoice.

What are the perks of factoring?

There are actually many different advantages to using a Los Angeles factoring company to assist your business. Let’s talk about just a few:

  • You don’t have to worry about collection your own invoices or debts any longer. The invoice factoring company will make it so that all of your time is free to worry about other aspects of our business.
  • You will be freeing up working capital that is vital to the success of your business. If you do not use a factoring company, you could be waiting anywhere from 30-90 days for your invoices to finally be paid.
  • Your factoring company may also check the credit potential of your customers so that you will only be working with good and trustworthy customers moving forward.
  • Your cash flow will improve immensely not that you have instant access to working capital.

What are the disadvantages of factoring?

While there are plenty of benefits, hiring a factoring company isn’t always right for every business or every situation. Here are some of the disadvantages of this process:

  • Since you do not receive the full amount of your invoice (factoring company fees and interest must be taken out), your profit margin will take a minor hit.
  • If you ever decide that you would like to sell to the public, the help of factoring companies will no longer be an option for you as they only deal in commercial businesses.
  • Since the factoring company will be taking care of your invoices and debts, your customers will know that money is being borrowed on their invoices.

Contact The Commercial Finance Group Today

Having uncovered the most basic aspect of factoring and factoring companies, you may want to know more. If that is the case, we would recommend that you contact The Commercial Finance Group today. We would be happy to talk to you more about the factoring services we offer or to simply answer any questions you have about factoring in general.