If you are a business owner, you will understand the importance of cash in the business. The working capital is the blood for the business and if there is not adequate cash, the entire business operations could come to a halt. There are different ways of raising funds for the business, however, what matters is the duration within which the funds are available and the cost associated with the same.
As a business owner, it is important to understand factoring and how it can help grow your business revenues. The biggest advantage of factoring is that you can raise cash within no time. If you apply for a traditional loan, you will have to go through the tedious process of making an application and submitting requisite documents while anticipating the approval of the same.
When there is a rapid growth of your business and you need to purchase new materials or pay vendors, you will have to opt for factoring because the traditional form of borrowing makes no sense at all. There are a number of reasons why you need to consider receivable factoring and the same are listed below:
Quick and Convenient
As mentioned above, factoring your invoices will give money in your hands in no time. It is an extremely fast way for any company or business owner to raise money. You can avoid the tedious procedure of borrowing from a bank or borrowing from a friend or relative, rather, all you do is use the invoices receivable and gain access to cash against the same.
In invoice factoring, about 80% of the value of the invoice is offered to you immediately and the balance is paid when the outstanding invoice has been cleared. This means, you get money in your hand the day you need it.
Shorten the Process of Collection
You might have had to wait for weeks or even months before your invoices are cleared. There is a credit period you offer the consumer when they purchase your goods or avail of the services offered by you. The consumer is supposed to pay off the amount within the given credit period and if they do not do so, there will be an interest charged on the outstanding sum.
With factoring, you can actually shorten the process of collection. Factoring will be your remedy for clients who pay less or pay late. You will not have to wait for them to pay the outstanding in order to run your business successfully. There are a number of factoring companies which offer quick and reliable services for every size and type of business.
Low Cost Option
The biggest reason why business owners prefer factoring is the cost associated with the same. There is a fee charged for the process of factoring but this fee is much lower than the interest charged by banks in case of the traditional form of borrowing. Whether you borrow from a bank or a non banking financial institution, there will be a processing fee and an interest charged on the loan.
When compared to factoring, it is higher and can be a burden on you. The loan is a debt and it will also reflect on your balance sheet whereas factoring leaves your balance sheet clean and helps sustain the business. You get capital without any liability on the balance sheet.
Ideal for companies that do not qualify for a bank loan
It is never easy to get a bank loan and it is only going to become tougher in the coming period because banks are holding on tighter to their money. If your company is recently established or does not have enough cash and bank balance, you will find it difficult to repay the loan or even qualify for a loan.
There are chances that your loan application will be rejected because the company is too small or you do not have the ability to repay the loan. In this case, the best is to use factoring services to grow and manage your business.
Ideal for businesses with no collection department
There are many businesses which do not have a collection department or do not have enough personnel to manage the collections for the business. In this circumstance, a factoring company can help with the process. It will ensure that the business owner has the money when they need it and the collection of the outstanding invoices will be handed over to the factoring company.
The entire process of factoring is efficient and hassle free which makes it an ideal choice for growing businesses.