Every business requires money to fuel its expenses, salary payments and for future growth. If you too are supplying regularly to credit clients then the need for ready money would be much more acute and this is where invoice factoring could bail you out. However, there are some pros and cons, which need to be considered before you blindly jump onto the factoring bandwagon.
In invoice factoring, a Factoring Company will purchase the credit invoices that you have drawn in your clients names. The company will then remit the invoice amount after deducting their factoring fee from that amount directly into your account within a span of 24 to 48 hours. This means that you get almost the entire amount of your invoice within 2 days instead of waiting for 30, 60 or 90 days that you may have specified in your invoice. The factoring fee will depend on various factors such as the credit period given to your client, the credit worthiness of your client as per the factoring company's eyes and the total value of your credit invoices that you submit to your company. These fees range from 1% to 5% per month.
There are several pros in going in for such a financing method. The most obvious advantage is an instant improvement in your cash flow. This will enable you to attend to your daily expenses and pay off staff salaries. This will also enable you to go in for accepting larger orders, which would not have been possible in previous times. You could also go in for bulk quantity purchases or cash purchases of your products and avail of special discounts. This will lower your purchase costs and increase your profit margin. This method is also simpler and faster than availing a bank loan, where the documentation could be extensive and you would need some collateral against the loan. In invoice factoring, the credit worthiness of your clients is more important than your own. If you have just started your business, then invoice factoring will be much easier to avail than a loan and this mode of finance will also keep up with the growing needs of your growing business since the more credit invoices you submit, the greater the amount that you receive from your factoring company. Many factoring companies also take over the entire responsibility of payment collection from you and this would free you from the daily stress of running after your clients for money.
There are also some drawbacks to this method of finance that need to be understood. Firstly, if your credit period to is too high, or if your client's credit rating is low in the eyes of the factoring company, then the factoring fees could be quite high as compared to a bank loan. Your clients too, might not be very comfortable if the collection is handled by a 'third party'. The factoring company's staff too might end up offending some of your clients if they pursue the payments aggressively. The factoring company might also not be able to handle your increasing business and might start defaulting on the payments to be made to you. If your profit margins are already very low, then going in for invoice factoring might be of no use.
So, think about the pros and cons of Invoice Factoring before deciding on whether it suits your business style and whether you can afford the fees charged by these companies.
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