We are guessing you have heard people say that it takes two to tango. We use that phrase to describe actions that require two parties to complete. Well here at fastFACTR, we have a similar phrase: it takes three to debt factor. If you are interested in knowing how debt factoring can help your business, you’ve come to the right place.
Debt factoring is a tool used by businesses of all sizes. Small businesses rely on it to manage cash flow when things get tight. Bigger businesses and corporations rely on it to leverage the value of their accounts receivables to generate cash for immediate needs. Regardless of the reason behind it, debt factoring requires three parties to make it work. Just like one person cannot tango alone, two parties can’t make debt factoring work.
1. The Creditor
The first party in debt factoring is the creditor. Let us say this is your company. You are a creditor to customers who buy your products or services. And unless your company requires full payment at the time of delivery, you are extending credit them. You may give them 10 days to pay, or 30, or even 45. All outstanding account balances constitute your company’s receivables.
Those unpaid balances are the foundation of debt factoring. They are essentially an asset you can use to raise cash. How do you do that? More on that later. First though, let us get to the second party required to make debt factoring work.
2. The Debtor
Having receivables that you can leverage for cash requires that you have unpaid invoices. Those invoices are generated whenever customers buy your products or services. Those customers are your debtors. By law, debt is an asset that can be bought and sold. That’s why companies can sell debts to collection agencies. The law treats debts as tangible assets.
Customers who pay for products and services at the time of delivery do not establish debt with your company. They are not part of the equation. Rather, you need customers to whom you have extended credit. They are the ones that provide the asset necessary to debt factor.
3. The Factoring Company
The third party in debt factoring is the factoring company. FastFACTR is such a company. We have the cash our clients need to meet existing financial needs. We purchase unpaid invoices from a creditor in exchange for a small amount represented as a percentage of each invoice. That is where factoring comes in.
The amount we charge is called the factor. It is nothing more than a portion of what a customer owes. We pay for invoices immediately, with the expectation of being repaid when customers make good on their invoices.
For all intents and purposes, debt factoring acts as a short-term financing tool. Companies like yours get fast access to much-needed cash without having to take out traditional business loans that come with interest payments, fees, and less-than-optimal terms.
Why do companies engage in debt factoring? There are plenty of reasons, including:
- maintaining cash flow
- meeting temporary financial needs
- settling long-term debts
- covering emergencies
- making capital investments.
There are as many reasons for debt factoring as there are securing traditional bank loans. It is less about why a company wants to do it and more about the factoring company they choose to do business with. Debt factoring is a highly competitive business, so the options abound.