Factoring is the selling of your past due invoices or accounts receivable to a third party.
You sell them the collection rights, and then they collect on the debt that was owed to you. However, factoring firms are not collection agencies per se, though they will work to collect on a debt. They will charge more, or rather pay you less, if the customer takes longer to pay. Yet factoring is a major industry that has benefits over other types of financing. Let’s look at the four reasons why manufacturers should consider factoring.
Factoring via an accounts receivable financing company is an excellent way to raise cash quickly. It moves capital to the front end of the business instead of waiting for payment at the backend. Factoring may let you receive cash within two days with one to two weeks being the norm. This is a much faster way to raise capital than applying for a standard business loan and then hoping for approval.
Regular factoring of past due bills enhances cash flow
The ideal process hands off the invoice after thirty days to a factoring firm, since accounts receivables more than three months old have less value. You are able to plan when you’ll receive the money and when in your processes to rely on invoice factoring. A side benefit of factoring is smoothing out the cash crunches suffered by seasonal businesses, whether your business or your customers’ business is mostly seasonal. The accounts receivable financing companies you use often may require you to stop doing business with a particular company that is a chronic slow pay, has a poor credit history or is at risk of bankruptcy. They gain this right when you sign a contract to work with the factoring company. However, your business benefits overall if you finally cut off those who are slow to pay you.
A lower cost than other ways of raising cash
If you are considering accounts receivable financing, it is cheaper than taking out high interest credit card debt or short term business loans to meet today’s cash crunch. And since accounts receivable financing is independent of your personal credit or business’ credit but instead depends on the quality of the customer who owes the debt, you aren’t going to face high interest rates because you were late on bills because this client hasn’t paid you on time.
Another benefit of factoring is that you raise money by selling the customer’s debt to someone else instead of taking on more debt personally, something that will not adversely impact your credit score or the interest rate on any other debts you have. And it won’t impact your business line of credit, except for the one you have with the invoice factoring company that takes over your past due invoices.
A side benefit of factoring is that it doesn’t put business operations at risk the way taking out a loan to buy business equipment or financing secured by the product you will sell, either of which could result in repossession and a disruption of your business if you miss a payment. Nor do you have to jeopardize ownership of your business by selling equity to raise capital when you can sell part of your past due invoices instead.
Improved productivity for your team
You can spend time cultivating new business opportunities or waste time trying to pursue a poor customer for payment. By using accounts receivable financing, you receive money now and are able to cut off that customer instead of investing more effort in a failed business relationship. Now you can invest more time in vetting new customers or improving the performance of your suppliers. Or you can work on improving your sales contracts, collecting from those who are barely past due or negotiating contracts with big companies that have a tendency to wait ninety days or more to pay you sooner as a matter of course. Then there is the fact that business owners don’t have to waste as much time and energy worrying about cash flowing in from slow paying customers and can work on their business.
Factoring is cheaper than a number of other ways you could raise capital like high interest short term loans, and it lets you do so on your schedule in short order. Relying on factoring instead of hectoring slow paying customers lets you focus on growing your business without using financing methods that put your business in jeopardy. Regular use of factoring smooths out your cash flow, especially for seasonal manufacturers, and it prevents cash crunches. And using factoring may improve your long term collections by forcing you to finally cut off slow paying customers who are pulling down your business.