There comes a time in the life of every business when a quick infusion of cash is needed. However, getting one is easier said than done. Bank loans come with all sorts of qualification criteria you must meet, while overdrafts are pretty expensive. Though it might seem like this situation has no good solution, it actually does, and it is called debt factoring.
What is debt factoring, you may ask? Well, you are in luck because we will break it all down for you below. Stay tuned to find out how you can make the best decision for your business.
Debt Factoring Definition
Put simply, debt factoring is the process of selling unpaid customer invoices. This process allows you to get the money your customer pays without waiting for the invoice to be due.
Typically, you receive about 80% of the invoice value as soon as you submit it. Once the invoice has been paid, you get the remaining 20%. However, the debt factoring provider will deduct a certain fee you have agreed on before signing the contract.
Attaining debtor finance is pretty easy. You need to meet specific criteria and to find a suitable investor. You can do this either at dedicated departments in banks or at companies that offer this type of financing.
What You Can Get from Debt Factoring Companies
Debt factoring can be rather helpful because invoices can sometimes take months to be paid. Even then, there is no real guarantee that a customer will pay, and you have a business to run. Debt factoring is what covers all your expenses in the meantime and helps keep your company afloat.
It is a great alternative solution to cash flow problems that require no banks’ involvement or the complicated process of getting a loan. Additionally, you no longer have to worry about the risks of a customer not paying for your product or your service. That becomes the job of your factoring company.
Plus, the fee you have to pay to this company is often quite low. In fact, it is much lower than the sum you’d have to pay if you brought your invoice management in-house.
The debt factoring company you pick also becomes responsible for managing your debt collections and customer payments. Thus, you no longer need to pay a staff member to do that, which can reduce your overhead even further.
Debt Factoring: Advantages and Disadvantages
Advantages
As we already mentioned, a quick infusion of cash and overall cash flow improvement are the main pros of debt factoring. Apart from these, it is also an excellent way to shorten the cash cycle as it is the most affordable option.
Finally, debt factoring is a shield against bad debt. You will no longer have to fear losing all your money or not getting paid, as your factoring partner will take care of everything for you.
Disadvantages
Debt factoring companies depend on the way you do business. So, if they see you engaging in high-risk behavior, they might ask you to change the way your company works if you wish to continue your partnership with them.
Another disadvantage is the fact that the factoring company basically takes over your customer relations. If they act irresponsibly or do anything to aggravate your customers, those relations might become negative. That could, in turn, lead to loss of customers.
Finally, debt factoring might not be the best option when it comes to cash-heavy consumer businesses. The same is true if you have many customers with poor credit records. In such cases, other options might prove more lucrative.
So, What Is Debt Factoring?
As you have read, debt factoring is a great way to improve your cash flow and keep your business running smoothly. However, it is not without its faults, which is something you need to keep in mind. We hope this guide helps you understand debt factoring better and push you to do even more research. That way, you will be able to do the best for yourself and your company.
Interesting Related Article: “Dream of a Life Debt Free? 5 Actionable Tips You Can Do“
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