4 Things to Consider Before Embracing Invoice Factoring
Debt factoring in Utah is what we do here at Thales Financial. We engage in a form of account receivable funding based on the invoice factoring model. Clients sell unpaid invoices to us in exchange for fast cash. We earn money by charging a fee for the service we provide.
Although invoice factoring has been around for hundreds of years and benefited untold numbers of businesses, it is not right in every situation. There are certain circumstances for which invoice factoring would be wholly inappropriate.
How can you determine if it is right for your company? By considering the four things discussed below. Remember there is no perfect litmus test for figuring this out. You need to consider all the circumstances that go into your scenario and make a decision from there.
1. Why You Need Financing
Invoice factoring is a form of secured financing for business. That being the case, the first thing to consider is why your company needs financing. You might be involved in an industry requiring significant overhead. Likewise, you need your cash flow to remain as steady as possible. Invoice factoring could be the ticket.
On the other hand, your company could be in a negative cash state because of poor business decisions and unwise spending. It is a situation in which invoice factoring would only help in the short term. More systemic changes are needed to secure your company’s long-term future.
2. Your Company’s Current Financial Obligations
You should also consider your company’s current financial obligations before embracing invoice factoring. A low debt-to-income ratio suggests limited obligations. In turn, this suggests that invoice factoring probably won’t be an issue for the bottom line.
On the other hand, a high debt-to-income ratio suggest that your company is already pushing it in terms of meeting financial obligations. Can you really afford to obtain additional funding, even if it is secured by unpaid invoices?
3. The Amount of Money You Need to Raise
To be clear, invoice factoring is designed to meet short-term financial needs in reasonable volumes. So ask yourself how much money you need to raise. If you are looking at a substantial amount of money you intend to keep tied up for a long time, invoice factoring might not be your best bet.
Think of invoice factoring as more like a cash advance in the form of secured borrowing. Then apply that understanding to why you are trying to raise money. Common sense indicates that invoice factoring is not the best choice for raising an amount substantially higher than normal receivables.
4. The Factoring Fees You’ll Pay
Last but not least, you definitely need to consider the factoring fees you will pay. Factoring is a service provided at a known cost. Factoring companies all charge their own rates, usually expressed as a percentage of total invoice volume. But rates differ from one firm to the next.
Before embracing invoice factoring, consider whether your company is in a position to pay associated fees. If your company needs every last dime and can stand to wait a little bit for it, perhaps avoiding factoring fees would be a better option. On the other hand, factoring fees may be a small price to pay to get the cash you need quickly.
Invoice factoring is the perfect tool for a lot of short-term business financing needs. But it is not always the right tool. Before you decide to do it, consider the many circumstances related to your decision. Thinking things through might reveal that invoice factoring is your best bet. But it could also reveal the exact opposite.