To factor or not to factor, that is the question. Companies that are seriously considering factoring need to be sure that they can benefit from a factoring program. Factoring should be looked upon as a tool that will directly or indirectly make you money. Not all companies are in a set of circumstances whereby factoring will add to their bottom line and if it is not adding to their bottom line it is obviously subtracting. So how does a company analyze their situation to see if factoring is right for them? Here are some examples of companies that should factor.
Which Companies Should Factor Invoices?
- Companies that need to extend credit terms to their customers in order to be competitive but don’t have enough cash to carry the receivables.
- Companies that have more business they could be doing but have to wait for receivables to pay before they can finance new business.
- Companies that have suppliers that are willing to give early pay discounts and/or larger lines of credit with prompt pay. Factoring can provide the funds to achieve this.
- Companies that have suppliers offering volume discounts. Cash from factoring accounts receivable gives the ability to take advantage of this.
- Companies that lack the personnel needed to manage credit and collections properly which factoring provides for.
Which Companies Shouldn't Factor Invoices?
Not all companies can say the above circumstances apply to their business and therefore may not have a valid reason to seek out factoring. They may even be in a situation where factoring should be avoided altogether. Here are some examples of companies that definitely should not factor.
- Companies whose profit margin is so slim that a factoring fee will put them in the red. These companies may already be losing money and although factoring may create enough cash flow to delay the inevitable, that only serves to make the eventual loss a much larger figure.
- Companies that have a lot of delinquent receivables and want to factor those receivables. They don’t need to factor, they need to have a strict understanding with their customers about payment terms. Factors won’t buy delinquent receivables and won’t buy current receivables if the debtors are not credit worthy. Some of these companies may need a collection agency.
- Companies that are doing a set amount of business volume and have no interest in expansion. Factoring in this case would have no benefit beyond convenience and would deteriorate the bottom line.
At UC Factors we are very interested in knowing that a prospective client can benefit from a factoring program. If we can see a benefit and we can show this to our client, it will make for a great relationship on both sides. If we do not believe we can help a prospective client we will say so, because moving forward would potentially create a bad relationship.
Deciding that invoice factoring is right for you shouldn't be the end of your research. Make sure you are also working with a factoring company that will be the best fit for your business and your needs. Take a look at our guide on how to choose a factoring company here: