Factoring is an alternative financial method that companies can use to improve their cash flow. It’s a method that many of us are still unfamiliar with. However, factoring can benefit companies that are not able to acquire their equity. These days, business funding can be difficult to obtain and it is even more difficult if lenders think that we don’t have good potentials in generating profit. Due to this reason, factoring is often considered as the last resort; however it isn’t entirely a new thing. But, for business owners who are unable to get business loan, factoring is often seen as a method to get money quickly. Factoring is suitable for companies that sell services, supplies and products for a fee. Factoring is also called accounts receivable financing. The most essential item in factoring is the unpaid invoice. It should be noted that factoring providers offer their services at a few. The factor simply purchases our invoices and they will collect the money owed.
Many factoring providers charge a service fee, but some purchase our invoices at slightly lower values. The amount of service fee and the reduction in value could depend on how long it will take for invoices to be paid. Again, because there’s always a risk associated with these invoices, we will end up getting less money than the value of the invoice. Due to this reason, factoring should be used only if our company has very low cash balances and we need to pay bills and employee salaries. However, when we choose to use factoring, we should make sure that we still get some amount of profit from the transaction, despite the service fees. Factoring providers determine whether our invoices are suitable. Invoices will never be purchased at their actual worth and this should be something that we need to consider. Despite this drawback, there are also advantages we will get by choosing factoring. In this case, factoring provider will check the credit worthiness of the debtors or people who need to pay for the invoices.
This is clearly a good thing if we have less than satisfactory credit score, but we need some money to reinvigorate our cash flow. This financial method should give businesspeople enough time to solve the financially constraining situation. Factoring is also known as bridge financing and it allows companies to improve their cash-flow while waiting for specific forms of funding. There are different types of factoring. Non-recourse factoring is when the factoring provider obtains full liability for invoices they purchased. In this case, we won’t be affected if the factoring provider doesn’t get paid. Recourse factoring is somewhat more complicated and we will be asked to bear some liability if debtors fail to pay. In general, recourse factoring could provide us with higher payments, because we share the risk if the invoice isn’t paid by debtors. Methods to obtain cash can be complex, so we should consider different risks, elements, rewards, payment terms and other factors involved.
