Businesses get cash by selling receivables to a factoring company. The factoring company then gives a fraction of the potential collection amount to the business after subtracting a certain percentage from the receivables. You can choose to sign a contract with recourse or non recourse terms.
Below are five factoring alternatives you can use to get capital:
- Specific industry factoring
- Invoice factoring
- Freight factoring
- Spot factoring
- Purchase order financing
Some industries have more complicated needs than others. The industries may require more effort which makes their factors advance from 70 to 80 percent. Industries that require less effort have a factor that advances between 85 and 95 percent. Examples of industries with complex needs include medical and construction.
This is the first factoring option that most entrepreneurs think of. Here, receivables are sold to a third party, which in turn collects what the customer owes. The amount of receivables sold and the time a customer takes to pay determines the percentage factor charge.
Many transport companies work with freight shippers or brokers. Freight factoring works like invoice factoring only, here transport companies sell overdue invoices at a less discount to a factor. The factors in most cases fetch the company cash or tops up the fuel cards.
This factoring is ideal for businesses that collect on single large invoices. If a debtor is creditworthy, the business receives cash in advance instead of selling receivables to a factor. Spot factoring enables businesses to get constant finances without signing ongoing contracts.
This is practiced by all players in the supply chain; manufacturers, distributors, wholesalers and retailers. If you don’t have cash for purchase orders, your bank or financing company can write a credit letter to the supplier for you to get the goods. You will pay the principal and any other charges to the financing company once your business makes sales.
Every business owner knows how best to keep their business running. Apart from the traditional ways of ensuring cash flow, entrepreneurs must make sure that they constantly get supplies to ensure the businesses remains operational.