Why should you use factoring when you can apply for a loan from the bank or line of credit? This is kind of a tough question to answer when every small business owner has different needs. However, there are some things to think about in the area of factoring (accounts receivable financing) if you are planning to take this route.
Most small business owners have first-hand knowledge of how difficult and stressful it can be to meet cash flow shortages and secure capital to keep their business moving in the right direction. That said, the first thing to do before you take the plunge into accounts receivable financing is to get the answers to a few key questions. The answers will give you the clarity you need to determine if this process is right for you and your business. According to Real Business Recovery business invoice factoring allows you to improve your business cashflow without the need to hire additional stuff.
What is a Clear Definition of Factoring?
In essence, factoring, also known as accounts receivable financing, is the selling of outstanding receivables or invoices – at a discounted price – to a company who specializes in factoring. The company accepts the risk on the receivables and gives small business owners access to quick cash.
The value of the invoice is based on the age of the receivable. Typically, the more recent the invoice, the more you’ll receive. By the same token, most accounts receivables that are past the 90-day mark will usually not be eligible for receivable funding.
What are the Benefits and Advantages of Factoring?
One of the greatest advantages and benefits to factoring is the chance to free up your resources so that you can focus on other important and more productive activities like marketing and advertising. Additionally, accounts receivable financing frees up working capital.
You can take the cash and invest in other areas of your business that may have been put on the back burner. It also open up the pathway for you to pay off a pressing bill of your own such as rent on your office building or purchase some much needed supplies for your employees.
Best of all, factoring does not require you to create a business plan or pull together tax statements in the way you would if you went to a bank for a loan. It’s a quick way to pull your business out of the red and into the black, especially if you find yourself in a cash crunch.
Here’s a way to look at it: Factoring can mean the difference between success and failure or survival and bankruptcy. Be diligent and consider all of your options. Remember, the factoring industry is not as regulated as the banking industry so you’ll need to put your best foot forward and research any company you’d like to work with to get the best possible rate.