The Pros and Cons of Invoice Factoring
Cash flow problems are par for the course for most businesses. No matter how long you’ve been in operation, you never know when an obstacle will arise and disrupt your access to working capital. More often than not, these issues can stem from a place that you don’t expect. When clients are not paying for services you’ve provided in a prompt manner, then this can easily cause you to fall behind with your own finances. Luckily, alternative solutions like factoring your invoices can help stimulate cash flow. Consider these points to weigh out the pros and cons of the service.
How Factoring Works
To understand the benefits of this service, you first need a basic idea of how it works. When you are in possession of unfulfilled invoices, you can reach out to a lender that specializes in accounts receivable financing services. The lender will assess the invoices and purchase the qualifying items from you. A percentage of the total value is given to you in advance and the difference is provided once the full amount has been collected from the client. Your business will pay a fee for the service and have access to the capital needed to cover basic expenses.
The biggest benefit to expect with factoring is having access to capital. Without steady cash flow, your business cannot pay vendors, invest in new ideas, or enter into a phase of expansion. What’s worse, borrowing money often sinks your business into further debt. With accounts receivable financing, you instead see an advance on funds owed. This means that you are not borrowing anything. Instead, you pay a fee for the service and can sit back and let someone else take care of the collection for you.
Like most alternative financing solutions, accounts receivable financing options have a few drawbacks. For one, you are not going to be able to use this service with all invoices. On average, qualifying invoices are those that come from larger and more trusted institutions like international corporations and government agencies. What’s more, the fee can be substantial in some cases. Do some quick calculations to ensure you won’t be taking a huge loss by using this service instead of simply waiting for the client to make a payment in full.
Though there are many elements to take into consideration, a service like factoring can prove interesting for businesses to explore. If you need to stimulate cash flow fast, reach out to a lender that provides this alternative financing solution.