It’s not uncommon for companies that seem to be teeming with business to run into money problems. Sometimes, it’s the way in which the business owners or the managers handle their money. However, other times, businesses are dealing with slow to pay customers. This is where factoring can be helpful.
Factoring is a method where a business leverages their accounts receivable invoices for immediate business capital. Factoring has been around for a while, but many business owners, especially those that are new to the concept of factoring, may be asking about the various factoring benefits and if this type of financial transaction is right for them.
The most evident benefit is that factoring allows businesses to have the money they need immediately. When a business essentially uses their accounts receivable as leverage for operating capital, the factor will typically pay anywhere from 80% to 90% of the accounts receivable immediately. This is precisely what a cash strapped business needs to order more materials to create more products, or to pay the employees that are providing the services the business offers.
In addition, with things like no recourse factoring, a business won’t have to worry about the potential of an owner of an invoice not paying. Non recourse factoring means that the factoring company can’t go after the business that used the accounts receivable for a factor loan if the owner of the account doesn’t pay. These types of factoring arrangements are typically more expensive in upfront fees, but the peace of mind of not having to worry about a client defaulting on their payment makes things much easier.
In some cases, the factoring company will actually pursue the individual or business with the outstanding accounts receivable. They may charge for collection services, but if it’s a small business focused on producing quality products or quality services, they may not want to waste a great deal of their time trying to collect on outstanding invoices.
The truth is that there are more benefits to factoring then could be mentioned in this article. The bottom line is that factoring can be helpful to businesses that have many slow to pay customers. That’s why, if your business is experiencing cash flow problems, and it isn’t because of poor money management, it may be time to look at what factoring can do to help your business in the short term.