Anyone who knows any little thing about improving the cash flow for a business knows that debt factoring can be a great contributor to this. Debt factoring accounts receivable factoring or simply invoice factoring is a lending strategy where immediate cash is availed to a business as they wait for customers to pay their invoices. By making cash available in the “immediate time”, debt factoring gives businesses an opportunity to grow and expand in ways that were previously not there.
Whereas no form of lending is purely bread and butter, debt factoring may be more alluring to some businesses compared to other forms of lending. It has its challenges such as the fact that factoring companies may influence your business if they feel that you engage in high-risk business practices, you risk bad debt liability and the interest rate charged is, of course, higher than that for traditional lending institutions such as a bank. This article will however not concentrate on the flows of debt factoring but on its strengths.
Advantages of Debt Factoring
• Improve Cash Flow
For many businesses, a cash flow problem is the main reason for slow or hindered growth. Struggling each month to make payroll and pay bills leaves very little room for expanding product lines, marketing the business and making important decisions that can help grow the business. Cash flow can alleviate these everyday struggles and by so doing make cash flow more seamless.
• Lower overhead costs
Debt factoring means that your invoice management will be handed over to the factoring company. The factor will handle your debt collections and customer payments. This will not only save you time by reducing the number of tasks but will also minimize your overhead cost since you don’t have to hire an employee just for this task.
• Cost-effective debt collection
As long as you are giving out goods or services on debt you must be prepared with some debt collection mechanism. Not all customers will just be good citizens and pay their invoices promptly without any reminder. Debt collection agencies are expensive; charging up to 50% of the value of debt as a collection fee. Factoring fees for collecting debt are friendly although debts that remain unpaid for a long period attract more fee.
• Quick cash
The biggest gain to debt factoring is perhaps the fact that it unveils cash within the shortest time possible. Normally your account will be credited within 24 to 48 hours after submitting the invoices, considering you had done the initial setup. This is a great deal if you need urgent money to perform equipment repairs, pay some bills or but urgent supplies.
• Protection against bad debts
Factoring that is not non-recourse offers you protection against bad debts from non-paying customers. By taking over the risk of unpaid invoices, factoring gives you an opportunity to concentrate on the more important issues in your company instead of worrying about non-paying customers.
If debt factoring is potentially the financing method to help your company’s cash flow, it’s necessary for you to understand both the benefits and the disadvantages and also explore other short term mortgage options. This article was only concentrating on the good side of the coin, but you should also check out disadvantages.