subject: Got A Cash Flow Problem? Business Factoring Is Your Solution. [print this page] Business factoring is a good tool for companies looking to raise money. In this process, a factor company purchases the invoices from the business, for cash up front. This immediate cash flow boost allows the business to continue doing operating and meet overhead costs in a timely fashion. This article will help you understand business factoring; the first step to deciding if this is the right option for you.
It is different from a traditional bank loan in the sense that a prerequisite is the value of the invoices, not how creditworthy the company is. Factoring is also not considered a loan but rather a purchase of assets and unlike a loan, which is between the bank and the loaner; here there are three parties involved.
Factoring is unsuitable for businesses that sell to the general public. It is a tool that is more suited to those that sell commercially. There are some other characteristics that determine a corporation's suitability for factoring. More than a third of its income cannot come from one single account and the company should not have too many small invoices.
Another consideration that makes a company unsuitable is, having a large number of complaints lodged against it. It will also be difficult if the entity cannot finish orders in a timely fashion or fails to meet consumer demands.
Once invoices are sold, the factor takes charge of collecting payment on the invoices. If you negotiate a non recourse agreement, you will not be responsible for accounts that are not paid off. Payments are made directly to the factor company.
There are several advantages like the fact that you can focus on your business instead of chasing down payments. If you are looking to expand, the factor might be able to provide you with useful advice and direction. Selling your invoices also allows you to shield yourself from non payment if you enter into a non recourse agreement. This means you will not be responsible for debts that are not fully paid off. The factor can also provide you with useful data on the financial situation of your pool of customers.
Undoubtedly the process also has its disadvantages, for instance ending the relationship with your factor may be complicated and problematic. This third party will also be interacting with your customers, if they do not have good business practices; you run the risk of leaving a bad impression on your customers. They thus have a significant impact on your company and how it is received by your clientele. While factor companies offer competitive rates, you will still be losing out in terms of the profit you make on each invoice.
Picking a great partner is a great start to a successful business factoring relationship. You want to be sure that whoever you get into a relationship with is trustworthy and has a good track record. With the right choices, it can be a cost effective way to inject cash into your company.
