More businesses than ever before are turning to factoring to meet their financing needs. Find out what the benefits and downsides are to see if it’s right for you.
No matter how rich the soil is, a farmer is not going to grow anything without enough water.
The same can be said about successfully running a business: no matter how high overall profits are, growth will grind to a halt without enough working capital.
Factoring is proving more and more effective at supplying businesses the capital they need to keep growing. But is it the best choice for your business? Find out the pros and cons of factoring to make an informed decision.
But first, let’s understand what factoring is.
What is factoring
Factoring is a form of debtor financing. When your business sells an unpaid invoice to a factoring company, you receive quick capital for the invoice amount, minus fees charged by the factoring company. The factoring company then takes over the process of collecting the debt from the entity that didn’t pay your invoice.
Why would a business choose factoring over traditional forms of financing? There are many reasons why it’s gaining popularity. Let’s look at three.
The benefits of using factoring
Necessity is the mother of invention. And there are financial needs for a business that aren’t satisfied by traditional financing. Here are three ways that your business benefits from factoring:
Instant access to your money
If every customer or client paid their bills right on time, many businesses would never need financing. But in the real world, things are more complicated. Money is constantly flowing out, with regular expenditures such as covering supply costs, payroll, etc.
On top of that, there are overhead costs surrounding goods or services that are spent on the customer—the same customer that hasn’t yet paid their invoice.
That’s where factoring provides a major advantage: instead of having to wait 30 to 90 days for customers to pay their invoices, you can get this money from a factoring company in only a few days. This lets your business continue to grow smoothly.
Cash Flow
Fast-growing companies have to incur a lot of costs in order to continue moving forward. This can create a significant funding gap. And the faster they grow, the more the funding gap grows.
Factoring offers a unique advantage in this respect. This is thanks to directly financing debt instead of involving a third party to secure a loan to cover that debt. So the more outstanding invoices you have, the more cash flow you can receive with factoring.
Thus, you no longer have to wait for bills to be paid before the money is in your bank account every month, allowing your business to scale with near-instant cash flow.
Easier than a bank loan
As touched on earlier, trying to take out a loan can sometimes cause more problems than it solves. That’s because bank loans aren’t always easy to apply for and can take time before you acquire funding.
This delay can be especially difficult when you’re already struggling with growing cash-flow issues. In addition, your company is tested for creditworthiness with a regular bank loan. So you may have to wait a substantial amount of time only to be denied approval for the loan from the bank.
However, factoring is easily and quickly arranged. Thanks to automated processes and custom-made online platforms, Factris makes it fast and simple to factor an invoice.
Another reason factoring is faster is that with factoring companies focus on your customers and not your company. They want to know if your customers are able to pay the invoices in order to make their approval decision.
Thus, instead of having to wait day after day to know if you can receive a loan, you can often find out the next day—or sometimes even the same day, and then quickly receive the amount you need.
At Factris, we specialize in speed and ease of financing. One way we do this is by taking over accounts receivable management. Because the outstanding invoice is now ours, we take care of managing the debtor.
Think about what you would be able to accomplish without having to spend time worrying about debtor management anymore. Moreover, you can now cultivate improved relationships with clients since you don’t have to do the dirty work of going after unpaid invoices from them yourself.
After reviewing the many benefits factoring offers, it’s clear that it has its place in helping businesses receive working capital. But what are its disadvantages? We’ll examine those next to have a complete picture of factoring.
The disadvantages of factoring
With all of its benefits, factoring does come with some drawbacks. These disadvantages may be minor or major, depending on what you want for your business.
Cost of factoring
Even though factoring is a form of debtor financing, you are still required to pay interest on the money you “borrow” with factoring.
It also has costs associated with each invoice you factor, since you pay a fee with every invoice you factor.
Less control over debt management
Having the factoring company assume the responsibilities for collecting debts can be a double-edged sword: on one hand, a business may prefer to not have to worry or deal with contacting customers to resolve overdue payments.
But on the other hand, not every entrepreneur likes to hand over control of dealing with customers. A business may not feel comfortable with having another entity assume this role, especially if customer relations are handled in a unique way.
Summary
For many, the advantages factoring offers far outweigh the drawbacks. It’s fast, easy, flexible, and scalable—just to name a few benefits. It does come with drawbacks, however. These are important to weigh to make the best decision for your business.
Do you want to know more about factoring and how it can help your business? We offer personalised answers from a human being, not a machine. Feel free to contact a Factris representative to keep moving forward.