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Jun 01

What Type of Businesses Benefit From Factoring?

Reading Time: 4 mins

Reports show that global factoring has been increasing steadily in recent years. Since the onset of the pandemic, factoring’s popularity has only but increased.

Volatile market conditions are a recipe for cash flow issues. However, factoring can be an ideal solution. What’s more, there are some industries that can particularly benefit from it.

These sectors have working capital challenges, thanks to the nature of their industries.

With the help of factoring, these businesses can smoothen their cash flow. Through this, they can achieve faster growth and more reliable operations.

Curious to know which sectors can benefit the most from factoring? Stay with us as we look at several industries that use factoring.


The Transport Industry

Boosting trade and supply chains, factoring is a valuable financing option for the transport industry. This is because transport and logistics are fraught with longer payment periods.

One of the reasons for this is that customers often purchase shipping on a monthly basis or in bulk.

This means that a lot of transportation is postpaid. However, trucks still need to be fueled up, repairs made, and workers paid.

If a transportation company’s cash flow is restricted, this can throttle its growth. Instead of taking on more loads and widening their routes, they’re forced to preserve their working capital for overheads.

Factoring allows transportation companies to exchange their unpaid invoices for cash.


The Clothing Industry

The apparel industry is another sector that can benefit from factoring. Apparel sales typically work on a seasonal basis. An apparel company usually has most of its sales at the beginning of a season.

While they are waiting for payment on their invoices, overheads still need to be met. Work also needs to start on new clothing lines.

Long lead times on stock invoices can impact operations. Factoring allows clothing companies to free up cash. Which then allows them to move forward on the next season’s ranges.


The Manufacturing Sector

The manufacturing sector is notorious for long payment periods. Trade credit is the norm, and businesses that don’t extend it might lose out to the competition.

Because of this, manufacturing companies are some of the businesses that use factoring. Factoring benefits this industry as it allows manufacturers to extend trade credit, while simultaneously turning their accounts receivable into cash.

Most factoring options do come with a factoring fee. However, this expense is offset.

Manufacturers enjoy an advantage by being able to extend trade credit, while still achieving healthy cash flow. This usually makes the factoring fee worthwhile.


Staffing Agencies

Another set of businesses that use factoring are staffing agencies. Staffing and recruitment agencies can easily experience cash flow issues. This is because while they need to pay staff by set dates, their clients often have generous terms on their invoices.

Clients may also be late meeting their invoices.

Picking up this slack can cause staffing agencies to run into trouble with their working capital. It also puts a hold on growth plans. To combat this, staffing agencies can use invoice factoring to bring in prompt cash flow. This also allows them to outsource a portion of their account collection.


Construction Companies

One of the industries that use factoring extensively is construction. Construction companies typically experience long periods between payments from clients. During this time, they still need to purchase materials, pay workers, and meet all their other overheads.

Although clients typically do pay deposits, construction companies usually have to cover a lot of the building costs upfront. If they run out of cash during these periods, this can put a serious stall on operations.

If construction companies have accounts receivable they can use invoice factoring to quickly convert these into much-needed working capital.


The Medical Sector

When it comes to industries that use factoring, the medical sector doesn’t immediately jump to mind. However, thanks to certain factors unique to this sector, invoice factoring can be a valuable financing option.

Medical businesses can experience cash flow problems for several reasons, including:

  • Slow payment from patients and insurance providers
  • Rising costs of medications and medical supplies
  • Equipment costs
  • Rising overheads
  • Changes in industry standards and government requirements

Medical centers and businesses aren’t always allowed to compel their patients to make payments. However, they can use invoice factoring to quickly facilitate enhanced cash flow.


Energy Companies

Energy companies face a lot of challenges, including large working capital needs and the fact that most growth opportunities require high investments.

Besides this, energy companies also commonly face slow accounts receivable and fluctuating sales volumes. Therefore, they are a prime candidate for invoice factoring.


Service Providers

Another set of businesses that use factoring are companies that offer services. Many services are paid on a monthly basis.

This means that service providers have to continually cover current costs with payments that have not yet been made. What’s more, if customers are late paying their bills, this can constrict cash flow even further.

However, thanks to invoice factoring, service-based companies who are experiencing tight working capital can simply pick from available factoring options and within a few days swap their accounts receivable for liquid cash.


Are You Considering Invoice Factoring?

Invoice factoring is an effective and simple solution for businesses whose cash flow is running dry thanks to unpaid invoices.

Invoice factoring takes far less time to apply for than a bank loan. You can often receive your cash within days. It is also easy to qualify for, as things like your company’s age and its credit score are not considerations.

The most important thing, however, is to go with a reputable factor, and preferably one that deals in non-recourse factoring. The factoring fee may be higher with recourse factoring options, but you take on less risk.


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