Just a quick glance at aging schedule of your accounts receivable tells you the high amount of accounts far over 30 days. Do you know you are offering free credit to those customers? Yes, they actually use YOUR money for free, while your company might be short of breath because of the cash shortages. And you do know, don't you, that you will have to get the bank loan to get the money for pay rolls or the money you owe your suppliers or the money you owe to your bank (including interests)... There are endless needs, to expand your business, to finance new investments, finance a start-up operation, marketing promotions, anything related to your business, besides current expenses on daily basis. So do you ask yourself what is the true cost of not having these funds available? And what all are you giving up to in missed opportunities when your funds are tied up in your invoices?
Providing a stable and predictable cash flow is of the highest significance for the success and stability of every business. When your money is in hands of your buyers and you are facing liquidity crises, factoring receivables might prove as a right opportunity to turn your invoices into immediate cash. If you want to put at end your customer’s expectations and demands to finance their business by extending terms of payment to thirty and in practice usually even more days, consider factoring receivable as an option appropriate for you and specific needs of your business.
Factoring receivable has nothing to do with the way how a bank loan works, with long and complicated way to convince the bank your business is sound and worth of trust. However, it doesn't works without the costs, either. You should count on two types of costs involved in this operation. First, a service charge related to the amount of sales factored and second, an interest charge for the cash advances. Service charges are mainly determined by your annual output, quantity of invoices and number of customers. Your monthly invoicing volume, average size of the invoice, average number of days to payment, creditworthiness of your buyers, all this facts are taken in consideration before the percentage of fee is settled down. The right answer when you are asking if factoring receivable is for you or not is not only in looking at factoring fee and accompanying costs. It is crucial to find out if and how your business may expand and increase your profits with the help of factoring, converting precious account receivables into cash via third party. Because factoring receivable is not a bank loan, certainly represents no debt in your ledger. In the matter of fact it is your own money that is advanced to you before your buyer is ready to open his pocket and pay the account receivable, i.e. invoice. If you need additional financial injection, your balance sheet looks good and makes it easier for you to obtain classical bank loan. However, never decide for factoring receivable as a way to get immediate cash for your business, before you carefully consider the pros and cons.
It is true, a sale is not completed until you have money in your hands, but there can be also some reasons that speak against factoring. Some customers might understand a factor's name on your invoice as a sign of instability of your business. Also, factor can refuse paying you on past due accounts. Besides, the expenses of factoring are higher than the cost of a short-term bank loan. Like said in the beginning, when all other options to obtain fresh current of cash are out of the question, do a thorough research to look for a possible factoring partner, consult your banker, accountant and check if anybody you trust has experiences in factoring. There are many companies offering factoring receivable services, and for your peace of mind it is wise to carefully choose the right and a reliable factoring company that fits your business profile and has your best interests at heart.
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