Running into financial obstacles can be frustrating when you own and operate a small business. Unlike larger establishments, small businesses don’t always have the access to capital needed to get through a period of financial difficulty. Without being able to rely on cash flow, your business runs the risk of going under. What’s most annoying about this situation is that there are plenty of circumstances where your financial troubles have nothing to do with the decisions you have made. When clients aren’t paying for goods and services you’ve provided, for example, you could be put in a difficult position.
Though delayed or negligent payments from your customers might set you back, there are ways to guarantee a more stable financial future. Factoring is an alternative financing solution that aims to solve the problem of unpaid invoices once and for all. Learn the details of this option and see how you can stimulate your cash flow and keep your small business running in a successful way.
What Is Factoring?
To get started, you absolutely need to know what factoring is. Sometimes referred to as accounts receivable financing or AR financing, this is a service that focuses on the unpaid invoices that are stacking up. A third-party financing company that provides factoring services will evaluate your invoices and determine which, if any, are eligible. The invoices that qualify will be purchased from you and a percentage of the total value will be provided right away. The company then goes about the task of collecting the full debt from your customers so you don’t have to.
Once the debt is collected in full, you will receive the difference in funds that you are owed. The factoring company collects a fee for the service provided and you receive the payment you have been waiting on. This is a simple and straightforward way for you to improve your access to available capital without having to go to extremes to do so. There are both pros and cons to using factoring, so it can be a good idea to take a step back and look over a few points before making any decisions one way or the other.
Perhaps the biggest benefit that comes with selling accounts receivable info is that you have access to the funds you need. This is money that you are already owed. Your company has provided a service to a customer and has not seen payment in a timely manner. Unlike other financing options like taking out a loan, selling your invoices is not going to put your business into any type of serious debt. You are technically not borrowing funds, you are being advanced money you are already owed by a client.
The service is also advantageous because it provides you with access to capital. For a small business, cash flow is vital to success. When you’re not receiving the payments you’re expecting from clients, it can completely throw off your ability to manage your budget. By using a service like factoring to obtain the funds you have been waiting on, you are taking control of the financial future of your business. Instead of being a victim of circumstance, you are doing what you need to do to find the success you deserve.
Considerations With Factoring
While there are plenty of advantages that can come along with the decision to factor your invoices, there are also a couple of cons of which to stay aware. Taking all of these considerations into account when making your decision will help you avoid getting stuck with a choice you regret. Essentially, factoring is a service that will only apply to specific invoices. The lender wants to ensure the client will actually pay back the debt that is owed to you. Due to this, invoices from larger institutions like government offices and big corporations are preferred.
Some factoring services can also involve more complicated arrangements. Should a business that provides AR financing not find success with collecting the debt from the invoices you have sold, you might be held responsible for the funds. Naturally, this will be included in your contract and not come as a surprise in the event that it occurs. Before signing anything, be sure to look over all of the details of your arrangement to ensure that you feel confident in what you are agreeing to.
Make the Best Decision
There are plenty of pros and cons to consider when it comes to a service like factoring. If you’re looking to boost your capital and are dealing with delayed payments from customers, AR financing could be the right decision. Weigh out your options and see what’s best for your small business.