When you engage in factoring or selling your accounts receivable, you’re accepting less money for an asset than you might expect to get for it. But there are great reasons for factoring and here are 10 of them:
- The ready cash you’ll get by factoring will help your company to grow. If you have $2000 ready cash in the bank, but you’ve invoiced for $100,000 down the line this will lead to $75,000. Think about it: the ability to hire more necessary staff, buy needed equipment, and have stock on hand could make a real difference to your business.
- Ready cash can help you pay your suppliers sooner, helping you negotiate discounts and have a larger credit line than you had before.
- Factoring your current invoices gives you the capital to take on large, deadline-oriented contracts and orders that you’d otherwise have to pass up because of slow cash flow.
- Those large accounts are worth money. Having cash on hand now allows you to offer longer payment terms to the new large accounts.
- Out of marketing comes business. With ready cash you can get from factoring, you can buy billboards, newspaper and radio ads, and even have direct mail campaigns for those timely marketing campaigns.
- If you’ve invoiced too much and now are finding yourself in a cash crunch, factoring will help you to meet your current expenses right away, reducing the chance of not being able to pay your bills. Nothing is worse for your company than not meeting payroll; you lose your best employees, and the ones who stay are probably going to be seeking other employment.
- You can improve your balance sheet with working capital without incurring debt.
- Pay off limited lines of credit, or lines of credit that are costing you too much in interest and fees.
- Factoring out slow debts allows you to skip the unpleasantness of making payment collection calls; instead, the factoring company does this for you.
- If you factor out part of your accounts receivable, the factoring company will give you a free analysis and comparison of what payment terms and credit amounts your customers really qualify for. This is invaluable information for conducting business in the future.
In addition to these ten great reasons to try factoring your accounts, there are a few reasons never to factor your accounts. If you’re concerned about late and slow payments without a good reason such as; you’ve given a thirty-day due date to someone and they take forty days to pay, then factoring is not a good idea. Instead, you should change your business practices to give a shorter due date. If you think your customer won’t pay, factoring their invoice out is dishonest, and will win you no points with a factoring company. Do you really want to ensure you have a bad reputation with people who trust you with a large amount of their capital?
If you’re in a dispute with a customer and you decide factoring out your invoice is a way out, you’re wrong. The customer could simply refuse to pay the factoring company and then sue you, or worse, tell everyone else what a horrible company you run. Face your disputes head on. If you are dissatisfied with the customer, don’t do business with them again.
Factoring to sustain a non-profitable business without some hope of profitability in the future is a sure way to drive your self into bankruptcy. Instead, you should let your business die a dignified death. Factoring so that you can remove cash from your business is a bad idea, akin to taking out a dozen credit cards so you’ll have money now. When you engage in factoring, you’re essentially agreeing to a profit loss; you should only do this if you stand to make more money in the long run.