Offering credit to your customers often causes financial problems if customers aren’t paying their debt. Accounts receivable factoring saves you the stress of waiting for payment. By selling your accounts receivable to a third party, you will be able to keep your business profitable.
When you give out credit to your customers, your gracious and profitable gesture of financial faith is often a double-edged sword. Customers love being able to buy things on credit, but if their payments are deliquent, you’ll find yourself in a financial mess.
Small businesses have a tough time in today’s marketplace, but there are a few strategies to stay ahead of the game. A major way to compete is by offering a line of credit to your customers. This is a way of saying that you appreciate your repeat customers. Credit is a great relationship building tool in the business world when partenered with accounts receivable factoring.
When you use a factor service, you are paid a certain percentage of the bill. This is usually between 75 and 90 percent. The remainder is held until the factor service receives payment from your customer. The company then pays you the rest, minus a small fee for the service.
If your small business needs capital in a hurry, accounts receivables factoring is a great way to raise cash. By using the quick turnaround of factoring, your business has the funds it needs almost immediately. You don’t need tax statements or a business plan to finance using a factor service. It’s a fast way to supply your business with the essential money it needs to grow.
If most of your capital is in your inventory, accounts receivable factoring helps money flow through your business. By freeing up capital tied up in inventory, you keep a steady stream of funds flowing. It’s also a great way to afford big ticket items for which you don’t have the immediate budget.
Of course, there are downsides to using a factor company. Make sure that you are aware of the fee. Sometimes this is as low as 2 percent, but can also be 5 percent or higher. It may not seem high at first, but if factoring becomes a regular part of your business strategy, it can be costlier than a loan. Remember to shop around for several different companies to find the best rate.
Ask yourself a few questions before selling your accounts receivable. Is this money necessary for survival or improvement? Is the money needed to take advantage of an immediate opportunity? Have all the options for funding been noted and explored? As mentioned before, the cost of a factor company may be more than the interest of a bank loan. Also, you need to decide if the economic conditions are right for financing.
Accounts receivable factoring has many of the benefits of a loan with a few unique drawbacks. It helps you avoid some of the hassle associated with banks and loan companies, but you must take precautions. Weigh the options, and decide if the time is right for your business to use quick capital as an expansion tool.
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