When your business is growing rapidly you want to achieve great success but finances can be an issue. It can take some time to get the money in the door because of the payers. Those who owe you money for invoices sent out can take up to 60 days to get paid. You cannot always wait that long. It is a common problem that it takes at least 30 days or longer to get the money in. Some clients even ask for extensions on their payments due to their own financial troubles. Banks can take a long time to get you a loan. They can also hold back on a loan if you do not have the right previous sales. If you have lower sales without a high cash flow banks may hold off giving you money. They have some high requirements when it comes to loaning money, especially recently. The terms can also be extensive with regards to high interest rates.
There are several problems with borrowing money even if you go with overdraft options. Overdrafts can also be expensive and you have to pay the money back quickly. If you have had trouble getting a loan from a bank or overdrafts, you might want to try the less risky borrowing option called factoring.
Factoring is highly effective in that you get the money you need when you need it rather than waiting for invoices to get paid. You borrow against the invoices. For every invoice you have you could get a percentage of it now rather than in 30 days. You collect payment and then pay off the balance due. The balance you pay back has to include interest and the fee. Often times you pay a percentage to the factoring company each month to ensure that you make good on the invoice money you borrowed. If you have a 1,000 pound invoice you could get 90% for the invoice or 900 pounds. Some companies will charge you fees and interest which is also taken out of the money before you are awarded it.
Factoring has been around for thousands of years, back to the Roman Empire actually. Prior to the new millennium it was looked at as a last resort for a company. Clients would move away from a company that would use factoring, but now it is the better practise.
Factoring offers you one of the best things in business. It offers you positive cash flow. You get to keep money coming into the business, which also means you get to pay your expenses on time. A positive cash flow also helps with customers. Customers want to purchase products, but if you do not have the money to get the inventory it is more difficult to fulfil customer needs.
You also get cash quickly when you use invoice factoring. You do not have to wait for the invoice to be paid, so you get the outstanding invoice now. It can lead to better financial planning. It allows you to have better risk options based on money investments.
Factoring is a highly competitive industry, which means you can get the best prices for your invoices by comparing the companies. It keeps the prices low.
With factoring you also get more information about your customers such as their credit risk. It means you can determine if you will allow them to borrow money or take longer to pay their invoice to you based on this extra knowledge.
Your business will be more professional if you have better cash flow. You won’t have to worry about paying other people. You also get to pay them back quicker, which tends to be more professional too. Bad debts are certainly issues you want to stay away from which factoring ensures you can.
As with any financial product there are negative issues. The following are some of the downsides to factoring.
The cost of borrowing money is going to be a downside with any loan. You do have a fee for every invoice factored. You will also have to pay interest on the money borrowed. Slow paying clients will definitely cost your business money.
You will lose a little control of how you do business. Factoring will take over the ledgers and work to get the debts paid. This means that you are going to be losing control of some aspects of your business. You do lose control of the debt management section of your business. Strangers will talk with your clients in order to get the outstanding invoices paid, so this can be slightly risky with regards to losing clients.
You are always going to be liable for the bad debts. If the debt is yet to be paid or is never paid you still have to pay the money back you obtained from the invoice. The invoice will then be unpaid and on your books as such. Factoring companies require the invoices to be paid within a certain period of time before you are liable for the unpaid amount. Factoring can be troublesome as a long term concept. You can get stuck in a cycle where you continue to use factoring because you are unable to break free. Yet, you have a good cash flow with the factoring concept.
Having cash in your business is more important than being stuck with too many debts.