Running a business can be tough, especially when it comes to managing cashflow. In an ideal world, a customer would place an order and pay for it and you would then use that money to buy the goods form your supplier at a lower price, thus making a profit.
However, in the real world it does not work like this. For starters, if you are selling to another business, they are likely going to want credit terms that would allow them to settle their invoices after a period of (usually) between 30 and 60 days. This means that they will expect the goods to be delivered and then they won’t make payment for another one or two months after receipt of the goods. In the meantime, you will have to order from your supplier.
While you should also get credit terms from your supplier, your bills are likely to be due before your customer pays you, which can cause a cashflow problem in some instances. So, is there anything that you can do?
Will Debt Factoring Help Your Business?
There are a few ways of generating cashflow for a business, and debt factoring is one of them. But how does it work?
According to the folk at Utah-based finance company Thales Financial, debt or invoice factoring is the process of selling accounts receivable to a third-party company. The invoices may be sold at a discounted rate, or the business may agree to pay a percentage of the invoice amount. The factoring company will advance the amount of the invoice to the business, giving them quick access to funds. Some factoring companies will advance the full amount of the invoice, while others will advance between 80% and 90% and will hold the rest until the customer pays.
If you are wondering whether invoice factoring is right for your business, you will need to consider the cost of the factoring contract. If access to immediate cashflow will help you to negotiate better terms with your suppliers, then you may feel that it is definitely worth it. With flexible funding, you may have the opportunity for quicker growth too, which is a massive benefit.
Some companies also like the fact that with debt factoring they do not have to worry about the credit control side of the business because the third-party company is taking care of it for them. They don’t have to hire staff to chase their customers for payment and so feel that the amount they are paying to the factoring company is worth it.
What to Think About
If you are going to factor your invoices, you need to be sure that it is a good solution for your business. Remember, you may end up paying more as your business grows, especially if the factoring company is charging you a percentage of the invoice total. The more you are paying the factoring company, the less profit you are making overall.
Invoice factoring might also not be ideal if it is going to upset your customers. Customers that have been with you for a long time might be aggrieved if you are selling their invoices to another company, and it could put a strain on your relations (particularly if you are factoring invoices from a reliable payer).
Debt factoring is something that may be worth considering if you need to improve your business’s cashflow. It can be a quick way to access cash and can help you to get better terms from your suppliers. But if you are paying a percentage of each invoice amount, it could end up costing you more money as your business grows.