Everything Business Owners Should Know About Factoring
Owning a business that relies on customers to pay invoices can present challenges when it comes to maintaining steady cash flow. Many companies use factoring as a tool to avoid the uncertainty of waiting for payment. Here is a breakdown of the process to consider before searching for a company to work with.
Most businesses utilize an accounts receivable system so they can be paid for products and services performed. The intervals of waiting for invoice payments can even extend to months, which makes it difficult for businesses to manage operations and meet expenses. Factoring works by actually selling your accounts receivables in exchange for instant cash. The financing company you have an agreement with is then paid the full amount by your customer.
One of the biggest reasons a business might need an alternative cash solution is that it’s unable to secure a traditional bank loan. Most bank loans tend to involve obstacles and even flat out denial for a good portion of applicants, whereas it’s typically much easier and quicker to get approval with a financing company. Access to immediate cash can also make all the difference for seasonal businesses that see significantly lower sales during certain months. Likewise, businesses with customers taking long periods of time to pay invoices may also see factoring as a useful solution.
There are always risks in any type of financial arrangement, but it’s smart to be aware of them so you can be prepared. First, keep in mind the high interest rates that many companies employ. Deciding if the risk is worth the reward is unique to each business. Don’t rush into an arrangement before understanding the contract, and do some research to make sure you can trust a company before entering into anything final.
Giving up part of your relationship with customers is also a risk to think about. If a financing company views some customers as too much of a credit risk, you may have to find ways to make up for the loss. Try to think of ways you can establish a good connection with your customers to avoid hurdles during the payment process. Keep in mind that e-commerce has made a closer look at regulations more imperative. Make sure your arrangement isn’t crossing any legal lines.
Factoring can be a great solution to obtain fast cash for your business. Find a trusted company offering a reasonable contract, and avoid risky terms to get the most beneficial deal.