Invoice factoring has benefits for companies in many different industries. If your business grants 30 to 60 days credit to your customers rather than collecting up front or COD, you are undoubtedly experiencing cash shortages waiting for your customers to pay. While your business may be very profitable, your growth and expansion can still be inhibited because of these cash shortages. In fact, growth can make the cash shortages more severe.
This is where invoice factoring comes into play. By liquidating your invoices as they are created your growth is no longer inhibited. You can take advantage of early pay discounts from your suppliers, volume discounts on raw materials, or any other advantage that ready cash provides to you. It is easy to see how ready cash creates benefits for your company, but there are other advantages that add icing to the cake.
No additional liabilities on your balance sheet.
Factoring has sometimes been referred to as “off balance sheet financing”. The reason is because factoring is a sale of assets, not a loan. When you sell an invoice, you decrease your accounts receivable and increase cash. You do not add anything to your liabilities.
By comparison, when you receive a loan you will increase cash but you will add a liability equivalent to the amount of cash you receive. Also, you have to pay back a loan and once the loan is retired, you are right back where you started. A factoring line revolves and is used on a continuous basis, so unless you breach a sales warranty, you are constantly receiving money you never have to pay back.
Free credit checking management.
A principal concern of a factoring company is the creditworthiness of your customer. The factoring company expects to collect from your customer, not you. Consequently, the factor is equipped to rapidly run credit checks on both your existing customers and any new ones you pick up along the way.
This valuable service would be expensive if paid for separately but is included in your factoring charge. Also included for many customers is the service of credit guarantee. That service is called non-recourse and means that if your customer fails to pay due to credit reasons, nothing is charged back to you.
Your line of funding will grow as your company grows.
Another benefit of invoice factoring is that there is no set limit of funds you receive from selling your invoices. As long as your customers remain in good standing and the credit is available to your company, you can sell invoices up to that limit.. That means that if you are a growing company who has a solid client base with a long history of invoice payback, your invoice factoring opportunity will grow as well.
Because your invoices are taken care of by the factoring company, you and your staff do not need to focus time or energy on debt collection. The time and resources you would normally spend on debt collection can be better used for other business operations.
As you can see, there are many benefits to businesses looking to begin working with a factoring company. The obvious perk is a business gets cash in hand quickly, but there are many other reasons to factor your invoices instead of applying for a business loan or line of credit.
Factoring provides your company with credit protection, free credit checking services and assessment, and collection service. It also provides invoice billing with postage and detailed accounting of records on invoices sold – all at a much lower overall cost than a traditional loan. While invoice factoring may not be the right choice for every business, it is certainly worth investigating if your business is in need of additional funding due to slow payouts from your invoices.
Thinking of hiring a factoring company for your business? Download our guide “How to Choose an Invoice Factoring Company?” for a more in-depth look on how to choose the correct factoring company.