Debt factoring is pretty common with businesses. It is the process of selling the invoices in your business onto a factoring company. It is usually done at a discount, and the job of the factoring company is to process the invoices they acquire.
There are plenty of benefits when it comes to this, and some limitations as well, but perhaps the number one reason why most businesses feel the need to do debt factoring is the need to inject some swift cast into the business in order to improve on the cash flow.
Understanding the whole process from the get-go is vital in ensuring that you have a smooth process with maximum benefits. In this review, we take a look at the pros and the cons of debt factoring in your business.
Advantages of Debt Factoring
Invoice factoring has plenty of benefits to businesses, which includes the following. Read on to learn more about the pros.
Increased Cash Flow
This is the primal goal of debt factoring. It is actually its key advantage. The process of debt factoring should in fact raise case for your business. It gets money from the customers who owe you, and you do not have to wait for them to even complete their transactions.
Although this process involves selling invoices at a discount, it is wise to consider this on a wider context. Even if you do not receive the real value of the invoices, you may save on time. Resources use in following up on the customers, and also you do not need to be bothered with processing the invoices.
Start-ups, entrepreneurs, and small businesses, can be able to inject some cash into the business to help them grow. It makes the difference between seizing opportunities and waiting for you to grow, versus, losing out and stagnating as a business.
Therefore, it is a good idea, as it injects some cash into the business. You can have enough cash at hand to last you a couple of days.
Shortens the Cash Flow Cycle
Most businesses usually struggle due to the normalized and expected time between the completion of work and expectation of payments. This is a lag that can cause your business some serious problems.
The good thing with debt factoring is that you are able to shorten this cycle, and it can give you the ability to continue with your business processes even when customers have not paid up yet.
You Can Make Quick Business Decisions
When you have money in the business, it becomes very easy to make quick decisions, such as buying new equipment, making repairs, increasing your stock, etc. This is all made easy if you decide to undertake debt factoring.
You Can Easily Expand Your Business
If you are ever presented with the opportunity to expand your business through a new client or a large order projection, then this can easily be done since you may already have the funds in the business that will facilitate this process. Debt factoring simply boosts your working capital.
Take Your Business to the Next Level
If you are entrepreneurial, then this is the perfect set-up for you to move on to the next level. Most businesses are usually crippled by a lack of funds, but when you debt factor your invoices, then it may no longer be a problem.
Limitations of Debt Factoring
Although it looks all rosy, it is important to also consider the main limitations of debt factoring, which includes the following. Read on to learn more about the cons.
Giving Some of Your Business Powers to a Third Party
The fact that another company is taking over your invoices, means that in a way, you are giving them some of your business powers, and even allowing them to run that part of your business.
There is really not a big risk with this, but if they start insisting on changes to your business, then you should be careful.
The most important thing in businesses is customer service, and with this new arrangement, it means that your customers may be managed by a third party. This isn't always a great deal, especially if you do not know how they are going to handle your customers.
The customers may not like how they are being managed by the factoring company, and then decide to leave you. So, be on the lookout for such things so you do not end up losing your clientele.
Debt factoring has been around for centuries, and most companies make use of this practice, but with the benefits and limitations outlined above. There are pros and cons to debt factoring, and these pros and cons should be considered.