As we discussed in an earlier article, factoring is a business financing tool which helps accelerate cash flow while also alleviating administrative costs and other issues associated with collection activities. What happens is a factoring company buys your invoices (accounts receivables) for a lump sum, and at a discounted rate. You then have immediate cash, and the factoring company now takes on the task of collecting from the clients who owed you on your invoices.
But as with any type of accounts receivable financing, factoring has its pros and cons. Let’s talk about the pros first.
Get funding quickly – Invoice factoring gives you an opportunity to get cash right away, usually within just a few days. If the factor offers invoicing online then it’s possible to get your money within twenty four hours.
Avoiding extra collections work – When you factor your invoices you’re outsourcing your accounts receivables collections and this frees you from having to perform the often time-consuming and costly collections work yourself. Moreover this allows you to concentrate on running your business without undue distraction.
Qualifying for more funding – With factoring you may be able to qualify for more up-front funds than you might with a small business loan.
Depending on your situation and your clients, factoring might not be the best solution for your business. Consider some of the downsides to factoring:
Your clients affect factor eligibility – If your clients are slow to pay, or if some of them have only fair credit, the discount rate you’d pay to the factoring company could be affected. If you have unreliable clients or don’t meet the factor’s standards, you might receive less up-front cash, or you could even been ineligible for factoring.
Not collection agencies – It’s important to remember that factors are not collection agencies. If a client doesn’t pay their overdue balance by an established date, or if they don’t pay at all, this will most likely increase how much money you owe to the factor.
Before considering factoring, be fully aware of your client’s pattern and history of payment. For certain businesses factoring can be beneficial, however if you have unreliable clients then factoring may not be a good option for you.
The Jayaram Law routinely and successfully assists its clients in their business-to-business (b2b) collection needs. We take pride in obtaining payment on accounts receivables without fracturing critical business relationships or engaging in time-consuming and costly litigation efforts.
If you need business debt collection services conducted in a professional manner, contact our B2B (business-to-business) debt collection law firm by calling 312.454.2859 or visiting www.jayaramlaw.com.