Most business owners know that during certain times of the year, things can get pretty tight, financially. This is why it’s important to know your options, and factoring is one of them.
For many years, businesses have turned to factoring companies to get additional cash flow. By becoming proactive and treating receivables as a source of immediate cash, you get additional cash flow that you need at the moment. Invoices from customers that will remit the payments at a much later date are still assets of course, but if you need the cash ASAP, factoring is the solution for you.
Who Benefits from Factoring?
It’s also important to understand exactly who benefits from factoring. Financial firms that offer factoring services will get a transaction fee from those who seek their services, but these are usually firms that have a lot of freed up cash and whose business is really focused on lending money to others. The problem with having too many assets in Accounts Receivable and not enough in Cash is that you don’t have a lot of elbow room to move. Fortunately the ‘factor’ who purchased your invoices and takes over collecting it from your customers will give you this elbow room.
Usually, those who benefit from Factoring services consist of small businesses who don’t have sources of additional cash. They also don’t have the capability to apply for large loans from banks and other traditional lenders. This is because traditional lenders usually look for external collateral that small companies may not be able to provide.
Additionally, traditional financial institutions may look at credit worthiness and credit history, and this becomes a problem for businesses who are just starting out. On the other hand, turning to your invoices as the main source of cash flow is a pretty solid financial strategy.
Advantages of Factoring vs. Loans
Both factoring and applying for a loan will give you elbow room, but here are some reasons why factoring is usually the better option:
- Goodbye, interest.
With factoring, you forego the interest rates that lenders charge. Depending on your company’s situation, these interest rates can be really steep when you turn to banks for loans or lines of credit. With factoring, which is an ‘advance’ instead of something you ‘borrow,’ interest is something you wouldn’t have to worry about.
Factoring also gives you flexibility in terms of how you use the cash. Whether it’s to pay your employee’s salaries, upgrade your current equipment, or fund your Marketing expenses, there’s no restriction whatsoever in how you want to use the money. Compared to loans, you don’t have to do anything to change your capital structure.
- Risk transfer
While with loans you have the risk of not being able to pay back the bank and getting charged sky-high interest rates, there is no such risk with Factoring. In fact, you’re transferring the risk of your customers not being able to pay you in full to the ‘factor.’
For more information about factoring services, please check out www.neebocapital.com.