How Receivables Factoring Can Benefit Your Business
Small business owners know how difficult it can be to make ends meet, much less get working capital going for a company. Sometimes, small business financing just isn’t available, or the options just do not make financial sense. If you find yourself in this position, don’t give up just yet. Receivable factoring may be the answer to your problems.
Some professionals refer to this option as a “business factoring loan,” or as “accounts receivable financing.” No matter what you call it, it’s clear that this can be an excellent choice for cash-strapped businesses.
What is a Business Factoring Loan?
Believe it or not, this isn’t some new, risky idea in the financing world. In fact, receivables factoring is one of the oldest forms of financing a business. So, how does this old trick work? You can sell your outstanding invoices to companies that exist merely to buy these receivables at a discount.
For example, a doctor’s office may sell debts that patients owe to a debt collections agency. However, the medical industry isn’t the only area that can use this type of financing. If you have open receivables, you may be able to use this kind of funding.
Pros of Accounts Receivable Financing
The most obvious reason to use receivables factoring is the fact that it can give you a serious influx of cash if you need it now. You can use this cash however you want and in any way that helps you get out of a hole. Furthermore, since it is not a loan, there’s no need to worry about increasing your debt or trying to pay someone back. The cash is yours.
Cons of Business Factoring Loans
As with any business funding, there are some reasons you might pause before taking this route. First, you will not ever get the full amount of what the client owes you. Once you sell the debt, the client owes the agency that bought it, not you. The company will only buy the debt at a discounted rate, so you will have to give up some of that potential money.
However, there’s a good chance that those invoices are outstanding for a reason. The customer may be hard to get money from or even difficult to reach. You can save a lot of time by selling this problem to someone who is better equipped to handle it. Since time is money for business owners, this might be worth it.
Receivables factoring is a great way to get some cash for your business when you need it most. Consider the pros and cons before selling your accounts, and you can make the right decision.