Accounts receivable factoring is a common form of business financing in the U.S, Canada and across the globe. As with any sort of financing, there are commonly known “pros and cons” for businesses utilizing this financing service. Instead of finding out after signing up or using the service, here are some of the most common advantages and disadvantages for businesses utilizing factoring.
Advantages of Accounts Receivable Factoring
The saying “cash flow is king” is very common for a reason. Cashflow is the lifeblood of a business. Factoring is a great way for growing B2B businesses to get the cash flow needed and continue to grow.
Invoice factoring is tied to the credit quality of a business’ customer. As a business continues to make sales and generate invoices to credit worthy customers, good factoring partners will continue to put up the funds and enable growth. This virtually unlocks unlimited growth. As the business’ accounts receivable grows, so does the access to working capital that is needed to run the business.
Invoice factoring is the purchase of business invoices to a factoring company at a discount rate. For this reason, utilizing a factoring company does not add debt to the balance sheet.
Some of the most stressful situations for a business owner is knowing whether or not they will have the funds to make payroll or fulfill an order. Having the cash flow that is needed to keep everyone paid is a huge stress reliever.
Works For Start-ups
Start-ups don’t have the years in business that many banks want to see, but in most cases, factoring companies do not require any time in business at all. If a start-up business owner has viable business plan and good credit quality customers, many factoring companies will be happy to work with them.
Relatively Quick To Get Set Up
An accounts receivable factoring facility generally takes 1-3 weeks to get set up and receive the initial funding. In certain scenarios, it can be done much faster, and sometimes it may take longer. But as a whole, this is a type of financing that can be set up fairly quickly and start funding a growing business.
Your Own Credit & Collections Team
Having one large invoice not get paid can be detrimental to a business. Aside from the funds, with a factoring partner a business receives their own professional credit and collections team. Factoring companies are always weighing credit risk of an account debtor or customer and this insight is passed along to you as a business owner. Along with that, it is important that the factoring company is able to collect on the monies owed. Factoring companies work with their client to aid in collections in a way that is not to the detriment of your customer relationship and is coordinated with the business owner and his preferences.
Accessible In A Tough Lending Environment
We have seen many times when banks tighten up their lending parameters. This can make it very hard for business owners to get the financing they need. Due to factoring being based on the credit worthiness of the customers, this makes it a financing that can be utilized no matter the lending environment.
Disadvantages of Factoring
Factoring Companies Generally Need Some Contact With Your Customer
When an invoice is factored, it is typically assigned to the factoring company. Part of the assignment process is notifying the customer that this assignment as taken place. If a customer is aware of this ahead of time and it is explained to them as financing growth, this is rarely an issue. But understandably, some business owners are cautious about a 3rd party finance company having contact with what can be a sensitive customer. Account Executives coordinate this with the Business Owner to smooth over this transition.
It is common for a factoring company to want some type of guaranty. As the advance rates are high and fraud is a real issue, the need for a guaranty is something that does come up. They can come in many different forms but the most common being a personal guaranty and a validity guaranty.
As was discussed in the advantages, getting set up with factoring is quick but not instant. So, if you feel you may need to utilize the service it is better not to wait until you are in a jam. Try to give yourself some time to get set up.
It Takes Ongoing Servicing
Factoring is not like a line of credit or loan where a business owner receives the money and may not have to deal with the financing again for some time. As the funding is based on outstanding invoices, many businesses are submitting invoices to their factoring company on a weekly basis. This does not need to be a long process, but this does take some organization and attention.
This could be put in either category so we thought we would add it as a bonus. The cost of AR factoring has come down a lot over the years. The discount on an invoice can be less then 1% of its value! Still though, this is typically a costlier type of financing then a traditional bank loan or line of credit. Businesses need to count the cost when getting set up with a factoring company. But they also need to count the bonus of continued growth provided by utilizing accounts receivable funding.
If you have any further questions about invoice factoring, feel free to reach out to us here at Meritus Capital anytime by email at firstname.lastname@example.org or call us toll-free at 1-877-648-3709. We have been providing factoring services to businesses across the U.S and Canada for almost 20 years!