Is Factor Financing Good or Bad for My Business?
When to Use Invoice Factoring
A/R factoring financing is a quick funding solution for businesses with unpaid invoices. Factoring invoices helps startups, small businesses, and not-yet bankable companies secure short-term financing solutions. Let’s explore some invoice factoring pros and cons.
Advantages and Disadvantages of Factoring Invoices
Factoring financing invoices is a reliable way for business financing due to cash flow issues. AR factoring financing is a great solution for companies with a startup company or business that is not yet bankable. Invoice factoring financing works by providing a cash advance on unpaid accounts receivable (AR). To learn more, visit our previous article, “What is invoice factoring?”
Invoice Factoring Companies like Bankers Factoring provide a funding source to businesses struggling with cash flow. AR factoring financing is a simple process compared to traditional funding like SBA loans or bank lines of credit. Factoring injects consistent cash flow into businesses by selling AR invoices.
Factoring invoices is a universal solution across all industries. What industries use factoring?
As with most options, there are advantages and disadvantages involved. In this article, we will assess the pros and cons of invoice factoring and when it is a good solution for businesses.
Invoice Factoring Financing Advantages
1. Factoring invoices provides fast working capital
The most significant advantage to invoice factoring financing is the immediate cash flow provided for the business to continue conducting business. This additional funding will provide the necessary resources to assist in balancing your cash flow.
2. Allows you to implement customer credit terms
Invoice factoring allows you to provide your customers credit terms of payment without any negative financial consequences. Once the related goods and services are provided, the invoices are factored providing immediate cash flow. The ability to offer credit terms helps businesses acquire large commercial customers. Government factoring is extremely beneficial to government contractors. Most customers expect 30-day terms ranging up to 90 days.
3. More effective customer credit management
Governing the creditworthiness of your customers is a considerable challenge for any business. As part of an answer to this challenge, Bankers Factoring carries out customer credit reviews with our team of finance experts. We provide an outsourced credit and AR team – a total AR management solution.
4. AR Factoring is easier to obtain than traditional finance vehicles
Fundamental requirements to obtain invoice factoring for your company include providing delivered work invoices, payable by creditworthy customers, in addition to being burden free of any legal issues and encumbrances/liens. With these requirements being fulfilled, invoice factoring is a more readily accessible solution to financial problems within your business.
5. The line can increase as you need it
As your accounts receivable increase, so does your factoring line. Businesses experiencing growth need additional financing to meet the company’s growth level is ideal for invoice financing.
6. Temporary resolution
Factoring invoices is a great short-term solution for companies that do not want to take on balance sheet debt. In our current environment with rising interest rates, interim cash flow solutions in factoring financing are helpful.
7. No additional forms of collateral required
Factoring financing only requires accounts receivable (invoices) as collateral. In comparison, almost all other conventional financial solutions require capital assets like inventory, equipment, and real estate as collateral.
8. Non-debt financing solution/ no balance sheet debt
Factoring invoices is a time-based operation that does not require any debt financing or equity financing. No monthly principal and interest payments. No requirement for selling equity is a huge advantage, considering once you provide equity, you surrender a percentage of your business, including a loss in control.
9. Suitable for small businesses
Most financial lenders depend on business volume in order to make a profit. Therefore small businesses that make as little as $20K per month are not as capable of obtaining a regular line of credit or business loan. However, Bankers factoring is a great option for not-yet bankable businesses, startups, and entrepreneurs.
Submit an online funding application today if your business needs fast working capital.
Invoice Factoring Financing Advantages
- Requires administrative labor
Customers utilizing cash flow financing through factoring are required to submit copies of invoices, schedules of accounts, and other supporting documentation.
- Only settles one obstacle
Lines of credit and financial loans can be effectively utilized for a collection of obstacles. However, AR factoring financing can be viewed as only a solution to cash flow problems caused by slow-paying clients.
- Factoring companies contact your customers
At the starting point of your contract relationship, your clients will receive a letter of assignment from the factoring company. This informs your customer, also called the account debtor, that the factoring company manages your AR invoices. Learn more about “How Factoring Financing Impacts Customer Relations.”
- Risk of bad debt from customer non-payment
Even with creditworthy customers, it is possible for bankruptcy or insolvency. Most factoring companies leave bad debt risk with the company selling its invoices. Bankers Factoring offers non-recourse factoring, which means we provide bad debt protection to our clients.
- More expensive than a line of credit
Industry average factoring rates range from 1.1% to 4% per 30-days, which can be more expensive than bank credit solutions. Bankers Factoring offers competitive rates from .9% to 1.5%.
Contact Bankers Factoring if your business is struggling to find commercial funding financing.
When to utilize invoice factoring financing?
Invoice factoring is a flexible financing option that provides payroll funding and working capital to unbankable businesses. There are two common reasons why businesses cannot obtain traditional funding like SBA loans or financial institution lines of credit:
- Startups and small businesses often lack the financial profile to qualify for conventional financing. Strong balance sheets with assets and liquid capital, along with sufficient cash flows, are part of the conventional financing underwriting process. Invoice factoring financing is much easier for startups.
- Financial distress comes in many forms. Some businesses have IRS, SBA, or EIDL liens. Other business owners are coming out of bankruptcy or other serious financial hurdles. Strong credit profiles are essential for bank lending qualifications.
Now you know the pros and cons of factoring receivables. If you’ve assessed that facotring your account receivables is a great option for your business, feel free to contact us and we can get you started.