Estimated reading time: 3 minutes
For some, it can be difficult to understand the need for factoring. At United Capital Funding, we found it important to provide an example. Not every company grows at the same rate as each other and your company deserves to grow and not fear whether you can pay your employees that month.
So what can you do about it? Factoring might be the best course of action for your company. Let us show you an example of factoring in finance to see how it all works.
What Is Factoring?
Factoring is simple. When your client owes you money for a service or product, you generate an invoice (these are accounts receivables). These invoices need to be paid, but it can take weeks or even months before your customer pays that invoice. So why not sell these invoices to someone who can finance on those invoices? Learn more —> How Does Factoring Work
And How Does It Relate To Finance?
Finance itself is a special branch of economics. This field concerns itself with the management of money, credit, and investments. Within finance, it’s the job of the employees to find the best deals and management techniques for their business to grow.
With this in mind, how do these two relate? Since factoring is the management of money for the sake of the business, factoring is a perfect road to go down. By using factoring, a company’s growth can rise before they know it.
Our Example Of Factoring In Finance
Now let’s go through an example of factoring in finance so everyone understands:
TechCo has three major clients: MouseTech, MassMedia, and HardSoftware. TechCo regularly supplies these companies with products. However, its payment comes thirty days after the order is delivered and fulfilled. This doesn’t work well for TechCo, who is growing quickly and needs the money sooner to pay its employees.
TechCo’s head of finance then offers the option of selling these invoices, or factoring them. Without delay, TechCo contacts a factoring company, such as United Capital Funding (UC Funding), to get the process going.
- To begin, TechCo submits an application and provides information about its three major clients.
- UC Funding approves TechCo for financing and submits a notification letter to its three major clients. Notification is the process of notifying TechCo‘s clients that UC Funding has become its financial partner and future payments should be sent to UC Funding’s secure lock box.
- TechCo is now fully onboarded and sends an invoice to MouseTech and a copy of that invoice to UC Funding.
- UC Funding provides TechCo with 80% of the full invoice value once the invoice has been verified by MouseTech.
- UC Funding services the invoice and once the client pays the full invoice amount, we send the remaining 20% of the full invoice value to TechCo, deducting our fees prior to sending that transfer.
It’s a simple integration into your cash flow process! After an invoice is verified, you’ll receive funds in the next business day. Never worry about payroll again and grow your business at the same time.
Need Another Example Of Factoring In Finance?
As we are owned by an FDIC-insured bank, United Capital Funding provides lower fees when you factor with us. Have a question? Having an example of factoring in finance on hand allows you to see just what you’re missing!