How factoring affects your business finance

Factoring refers to a practice where you sell your receivables for a discount before they are due. Today, factoring companies are willing to buy creditworthy receivables from just about any industry. So, how can factoring affect your business finance?

Most often, factoring is used by rapidly growing businesses that are facing short-term finance issues. Factoring is kind of an expensive way to obtaining financing for your business. You are essentially paying for the cost of the capital, bad debt, and the paperwork that factoring has. If you can finance your business through other sources, you will most likely save money.

What are the fees associated with factoring?
Once you and the factoring company determine which invoices it will buy, the factor will typically pay you an advance. They may pay you a percentage up front and give you the rest when your customers pay their bill. Factors' fees differ depending on the size of your invoices, and what your customers' credit is like and the number of days in your collection rotation. You should expect to pay anywhere from 3 percent to 7 percent or more of the total the factor collects.

Factoring can affect your business finance in a number of positive and negative ways. Let's take a look at the pros and cons at how factoring affects your business finance.

The pros:

• It's great for companies to sell future receivables, including credit card receipts. Typically, companies buy them at a discount for cash upfront.


• It is a quick way to get cash in advance. Overhead charges get automatically reduced with the cut in invoice processing.


• The business owner doesn't have to worry about invoice processing like depositing checks and entering payments.


• It is an easy way to have access to unlimited capital for the business.


• It can be a cost-effective way of outsourcing your sales ledger while also freeing up time to manage your business.


• It assists smoother cash flow and smoother financial planning.


• Factoring can be an excellent strategy as well as a great financial resource when planning your business growth.

The cons:

• The cost will mean a reduction in your profit margin on each order.


• It may reduce the scope for borrowing and book debts will not be available as financial security.


• You will have to pay off any money they have advanced you on invoices if the customer hasn't paid them yet so it may be difficult to stop factoring.


• If you don't work with a reputable company they may damage or ruin your financial reputation.


• You will have to pay extra money to remove your liability for bad debtors.


• Factoring can place businesses customer relations in the hands of another company. So, if aggressive collection procedures are involved, this can ruin relationships and drive away customers.


• Factoring can also show customers that your business is struggling financially and may not be a reliable long-term supplier of services.


• Borrowing against receivables also accumulates debt on your balance sheet which does not look good either.


• A factor can turn down invoices of customers that don't have good credit, or it can stop paying you on accounts that remain past due. If you have a lot of customers in debt to you, factoring probably isn't a good solution.


• The cost of factoring is higher than the cost of a short-term business loan. Many businesses turn to factoring as a last resort when they can't get bank loans or lines of credit.

So, is factoring right for your business? Factoring can negatively or positively affect your business finances, depending on your situation. Deciding to factor can be a difficult choice.Remember, factoring can be a piece of mind for your business. Each person involved has responsibilities and must live up to them in order for the factoring to work. If you need cash to run your business, capital expenses, payroll and other expenses, factoring could be the perfect solution for you. Take time to consider all the possibilities and make sure that the decision you make will positively affect your business finances.