Is your business having a hard time with cash flow? Is a lack of available funds getting in the way of meeting payroll, paying invoices whilst trying to generate some kind of profit?
Perhaps you’ve tried securing that business loan and line of credit with little to no success. Well, don’t despair. There is a solution and it comes in the form of factoring your company’s receivables or customer invoices.
What is factoring you ask? Factoring is selling your company’s outstanding invoices to a company who will pay a portion of that outstanding balance whilst deriving a profit from what they pay your company, and what they collect on those invoices.
It’s a simple and extremely effective way to generate cash quickly. However, there are both benefits and drawbacks to using factoring and it is incumbent upon all businesses to be cognizant of the pros and cons.
• Factoring impacts gross profit:
Every enterprise works hard to generate a profit. Using a factoring company guarantees that either a large portion of the gross profit on the sale, or all of it, will be lost. It really depends upon the factoring company buying the invoices and what they are willing to pay for them.
This depends upon the health of the market as well as the customer’s credit history. Suffice it to say, if the customers in a given industry are high credit risks, then the company likely won’t secure as high a payment for those unpaid invoices.
• Factoring lets customers know there’s cash flow issues:
Most companies aren’t terribly happy about their customers knowing about issues with cash flow. After all, this is something customers are better off not knowing. It can leave customers with concerns about the viability of their supplier’s future.
Unfortunately, once a company decides to use a factoring company, it’s no longer a secret. Customers will now have to pay the factoring company and that can often be an uncomfortable situation for all parties involved.
• Factoring allows companies easy access to immediate financing:
Whilst there are some drawbacks to factoring, there are an equal number of benefits. Factoring allows companies to secure immediate cash reserves. When times are difficult or when companies are tired of customers taking too long to pay their invoices, factoring is a reasonable solution.
With interest rates and credit as tight as it is in one of the worst recession in decades, factoring has become a proven way to secure those much needed funds.
• Factoring allows businesses to make a clean break from the market:
If it’s time to close the doors, or simply time to move in a new direction, factoring allows businesses an opportunity to collect on payments and pursue new opportunities. When companies want to end a customer relationship, or need a fresh infusion of capital to start the pursuit of a new market, factoring allows businesses to get cash immediately and begin anew.
Every business faces issues with cash flow now and then. No business is immune from the effects of today’s recession. For some enterprises, the costs have mounted from increased customer bankruptcies and delayed payments. It’s a vicious circle and one late payment often leads to another.
However, there is a solution and factoring is quickly become the option of choice for companies that need cash immediately.