Is Factoring is an Expensive Form of Finance?
This depends on your situation. If you use the funds to grow your business through marketing or to eliminate payroll expenses for accounts receivables, factoring can actually save you money. Factors generally take on many of your accounts receivable tasks. For example, they examine the credit of your customers, collect the payments on the invoices, and provide you financial reports that detail the status of your receivables. While the rates may be higher than some low-interest business’s loans, that’s irrelevant if you can’t qualify for the loan. So you really have to think about the cost of not having the cash you need to grow your business by funding acquisitions, implementing marketing and promotions, or purchasing more inventory or supplies. In addition, credit lines are limited while the funds you receive from factoring can increase right along with your sales volume.
Is Factoring Only for Businesses About to Go Under?
While it is true that businesses experiencing a tough season can benefit from factoring, many businesses turn to factoring for the exact opposite reason. Factoring is a popular financing strategy for businesses that are growing rapidly. Sometimes these are newer companies that lack an established credit history or that have financial ratios that do not allow them to qualify for traditional bank loans. By using factoring funds to grow their sales volume, they also increase their total profits. Also by decreasing the time interval for outstanding invoices, some are able to capitalize on early payment discount from suppliers.
Is Factoring a Long-Term Arrangement?
Although many companies and industries use factoring as an ongoing financing strategy, a long-term commitment is not required. Some companies use it as a short-term strategy to improve their financial standing for a traditional bank loan, navigate seasonal supply and demand issues, jump start growth, acquire other businesses assets, or expand operations.
Hopefully this article has cleared up some of your misconceptions about factoring. If you have any more questions, contact us!