Invoice Factoring can be a lifesaver if you are a small business that struggles with cash flow. On the other hand, it can also be an unintentional way in which you cost yourself money. As noted by the financial experts at Lantern Credit, factoring invoices occurs when, “you sell your unpaid invoices to a factoring company, or factoring receivables company, who then takes ownership of the invoices. Because you are selling your invoices, invoice factoring is technically not a business loan.”
There are, of course, pros and cons to this approach.
Immediate cash flow
One of the true killers of any small business isn’t sales, but cash flow. With factoring, you can be provided with an immediate, up-front cash advance for your sales, then a large chunk of the rest of a fee once a sale is completed. The amount of money you receive may vary, but this is a great way of immediately monetizing your cash. Even in the best of circumstances, many businesses don’t receive immediate payment for completing a sale. This, of course, can be a huge boost for any small business, giving them the cash they need to survive, while also enabling them to save money on credit card usage or interest on business loans.
Small businesses often lack the resources, manpower, and expertise to chase down money that they are owed from other businesses. A good factoring partner can do this work for a business, saving that business invaluable time, money, and staff resources. The business in question can then reinvest the money that they would have spent chasing down money into other, more profitable purposes.
Costs you a substantial portion of your sales
A factoring fee can wind up eating out a chunk of your profit margin. Depending on your specific line of work, this may be untenable for you. You may wind up needing to increase your prices in order to make up the difference, and this risks hurting your competitive edge and driving more customers away from you.
May be better handled in-house
Factoring can be very useful, but depending on your line of work and the rates charged by a factoring company, it may be more appropriate for you to handle accounts receivable in house. This, of course, depends on a variety of factors, including your specific industry, your expertise within this field, and your ability to track down dollars. Only you and your business are capable of making this determination, but the benefits of any factoring must be weighed against whether or not you’ll truly save money in your business.
Factoring may or may not be right for you and your business, and a variety of factors go into determining if this is the case. Make sure to do your research into if this is the right decision for you and determine if there aren’t better ways to obtain the cash flow that you need.