Pros and Cons of Invoice Factoring – Find Out if it’s Right for You
Does your business need immediate access to cash? Invoice factoring can provide you with just that. Let’s talk about the advantages and disadvantages of factoring to see if it’s the right choice for you.
If you didn’t already know, factoring is when a third-party lending firm “buys” your business’ accounts receivable and gives you a cash advance based on the unpaid invoices. The lending company will then take over collecting the owed receivables, while charging your business a percentage of the invoice as a fee for using their service. This financing process allows your business the access to the cash it needs, instead of waiting 30 or 60 days (sometimes longer!) to collect payment from your customers.
This form of financing is typically used by companies or businesses to maintain cash flow. It’s commonly used in industries where immediate cash is needed to continue to run the business, like manufacturing, staffing, transportation and oil field services, but is definitely an option open to any business that has unpaid invoices from customers but needs the money before the due date of the invoice.
If you are considering using this service, keep the following in mind:
Time Savings. Factoring can save you the time that you would’ve spent collecting payments from your customers. That time and energy can be used for other business-building things, such as sales, marketing, advertisement and customer development.
Good for Growth. You can use the fast cash you receive to help generate growth, such as hiring one another salesperson who can work to bring in more clients. Or you could purchase advertising materials, like a billboard or an upgrade for your website, to reach new customers. You could also purchase new equipment or upgrade old equipment, materials or anything else your business needs.
Doesn’t Require Collateral. Unlike bank loans, factoring companies don’t require you to put up your house, warehouse, office space, or other property as collateral for the financing you’ll receive.
More Funding than Traditional Loans. Typically, a lending company will give you a cash advance on up to 80% of your receivables, which may be more than you would receive from a traditional lender, like a bank.
It’s no secret that there might be a few downsides to however you decide to acquire cash for your business. You need to take everything into consideration before choosing what type of financing is right for your business. Let’s look at the most common “disadvantages” to invoice factoring.
Giving up Some Control. When you accept cash advances for your unpaid invoices, you might be giving up some control of your business. For instance, the factoring company you go through could potentially deny your ability to do business with a certain customer because of their poor credit history or rating. This could be seen as a disadvantage because they might default on their payment and the company purchasing your invoices could lose money, but would you want to work with someone that wouldn’t pay you, either? Probably not.
The Cost. While it might be necessary for your business to have access to fast cash, it will most likely always come at higher price than a loan from a bank. Factoring companies typically keep around 1-4% of a receivable as their fee. Keep in mind that you’re using a service and the factoring company needs to also make money. You’re both providing each other with business; you’re using their service and they’re giving you the capital you need to continue to run your business.
If you’ve looked at all the pros and cons of invoice factoring and think it’s the right option for your business, head over to http://www.factoring-invoices.com/ and get started!