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Benefits of Factoring – Weigh Them Carefully
One of the biggest benefits of factoring and probably the most common reason people seek out this service is the need for steady cash flow. Consider briefly how factoring works, then look at how factoring can help your company get cash on hand on a more regular basis.
Why Not Just Take Out a Loan?
Factoring is basically a method of increasing the amount of cash available for your business expenses at any given time without taking out a loan. So why not simply take out a loan? There are several reasons. Let's take a look at a few of them...
Factoring can produce cash almost instantly.
The approval process is typically faster than for a formal loan from a bank or other lender. If you're working on an invoice factoring plan, you'll get money within a few days of the factoring company's receipt of the first set of invoices. In many situations, your bank's policy of getting the money into your account will take longer than the actual disbursement of funds.
It's easier to qualify.
While there is an approval process, a factoring company is going to be much less concerned about your proven ability to repay a loan. Here's why: If you're doing invoice factoring, the people you do business with are going to be the ones making "payments" on your factoring loans. The factoring company will give you a percentage of the face value of invoices, but there's never a need for you to repay that money. The factoring company will receive their reimbursement when the company named on the invoice pays the amount due. Since you won't be repaying the amount advanced by the factoring company, your ability to repay is really not at issue.
Debt Relief
If your company is already facing a significant amount of debt, factoring can help you meet financial obligations (including loan payments) on time. What's better, you can accomplish this without taking on more debt. Borrowing to pay off loans becomes a vicious cycle for many small businesses.
Improved Credit Rating
What's more, factoring can be an important way to keep your credit rating higher. This could be vital to the future growth of your business. If you're expecting to be looking for a loan within the next year or so for business expansion, lenders will likely be looking closing at your current credit rating. The amount of debt you currently have affects your credit score. Using factoring instead of a loan to increase your credit score could be an important boost to your ability to take out a business expansion loan.
No Regular Payments
Another benefit of factoring is that you're not typically going to be making any regular payments – the bane of small, fledgling companies. Depending on the type of factoring you do, you may get a regular boost to your cash flow or you may opt for a one-time factoring opportunity to get the cash you need for a particular purchase.
That's not to say that factoring isn't without downsides. You're paying a price for the opportunity to factor, and that's money that most small business owners can use. Typically, the immediate flow of cash is more important to the small business than the small fee charged for factoring.
