Small business owners often struggle with cash flow and working capital requirements. Since a considerable amount of sales is done on credit, funding regular operations can be a challenge. Factoring, also known as invoice financing, is the process of selling accounts receivable to a factoring company to get a quick loan. So, should you consider factoring for your business needs? Below are the things you need to consider.
Knowing the process
The process of factoring is rather simple. Unlike conventional loans, here you don’t have to wait for a long period to get the loan. The first step is to contact a factoring company, which will verify the creditworthiness of your debtors. If the open invoices are genuine and are verified, you will get the loan within a couple of days via wire transfer or direct deposits. As much as 90% of the invoice amount can be received through factoring, which is a great advantage, while the rest will be paid as the invoices are paid by the debtors. The factoring company will charge a small amount as a fee for their services.
What are the pros and cons?
Factoring is a simple process in itself, and since there’s no need for collateral, this form of financing works for most companies and industries. A business may not have great financial credentials, but as long as it has reputed debtors, getting a loan is not complicated at all. Factoring is also effective when owners are not ready to risk their equity or business assets, and as compared to regular loans, the whole process is rather easy and allows the business to convert pending bills into quick cash. Factoring allows businesses to have enough funds as and when required, and the amount can be used for varied requirements. If you want to maintain your reputation among creditors, you can use invoice financing to pay the outstanding bills. As for the cons, there aren’t many, but the charges of factoring companies can be high at times.
Choosing right factoring company for your business is also an aspect that needs immediate attention. You need a well-funded company that has a solid reputation in the market. They must explain the terms and conditions in detail and should have transparent fee structure. You should also take your time to read the terms and conditions in detail, which will help in settling disputes, in case the debtors don’t pay their dues in time.