Every growing business reaches a point at which decisions about expansion need to be made. Moving forward will require making decisions that could potentially jeopardize the company’s cash position. But if steps are not taken to move forward, expansion won’t occur. Enter debt factoring.
Debt factoring is the practice of factoring your invoices in order to raise cash. In essence, the law treats unpaid invoices as assets. They are assets that can be legally bought and sold. In a debt factoring scenario, unpaid invoices are being sold to a factoring company. The seller receives a certain percentage of the invoice value at the time of sale. The remainder is paid, less the factoring company’s fees, when the invoices are eventually paid.
How does this help with business expansion? There are lots of ways companies can leverage debt factoring to help with expansion. The remainder of this post will focus on a single scenario: using debt factoring to cover short term payroll expenses.
Labor Is the Biggest Cost
Labor is the biggest cost of doing business for most companies. So think about that cost in terms of expansion. Imagine a small manufacturing firm that wants to introduce a new product. Before it can sell that product, it must produce it. And in order to produce it, the company needs to bring on additional workers. The company must spend money on labor before that labor generates actual revenues.
Fail to hire new people and the company will not be able to manufacture its new product. But without that new product, expansion isn’t going to happen. Debt factoring bridges the financial gap between hiring new workers and generating revenue from their labor.
The Resources are There
Turning to debt factoring for this sort of thing isn’t as risky as taking out a loan. With a traditional loan, you are actually borrowing money. But with debt factoring, you are selling an asset. Debt factoring recognizes that the financial resources to hire new staff are already there. They are just tied up in invoices that may not be paid for 30-60 days. In essence, debt factoring releases those financial resources now, when a company needs them.
Factoring invoices for a long enough period of time gives the manufacturing company the opportunity to bring on new workers and get production rolling. Every piece that comes off the production line represents revenue. In an ideal situation, it would only take a few months for production to start paying for itself. Debt factoring would no longer be necessary to cover payroll.
Better than Bank Loans
Bank loans have a place at the business financing table. They are a valuable tool companies should utilize as needed. But in our example of covering short term payroll needs, a bank loan is not the best way to go. Bank loans cost money. Companies pay interest and fees. And if things don’t work out, they are still on the hook.
Debt factoring is different. When you factor your invoices, you are not borrowing anything. Your company isn’t falling further behind while it attempts to bring on new workers for expansion. Again, you are simply selling an asset your company already owns. We think this is a better way to cover short term payroll needs brought on by business expansion.
There is a lot more to debt factoring that we haven’t explained in this post. If you would like to explore it further, we would be more than happy to discuss how it could help your company reach its expansion goals. Debt factoring could turn out to be one of your best financial tools.