We can say with confidence that debt factoring is a legitimate and workable funding tool plenty of small businesses benefit from. But we also need to admit it is not right for everyone. Businesses must weigh the pros and cons. Our experience has been that the pros of debt factoring outweigh the cons more often than not.
Also known as invoice factoring and invoice finance, debt factoring is a way to raise cash by selling unpaid invoices to a factoring company. In essence, a company is leveraging its existing receivables as a financing tool. It is simple enough, right? Debt factoring is one of the least complicated financing options small businesses can take advantage of.
Debt Factoring’s Pros
Why would a small business choose debt factoring over other types of financing? Debt factoring brings a lot of good things to the table. For starters, raising cash through debt factoring takes nearly no time at all. Debt factoring gives companies immediate access to fast cash. That makes it ideal for:
- short term needs
- emergency situations
- maintaining seasonal cashflow.
Speed is a crucial factor for many of our customers. They don’t want to wait 30-90 days to arrange other forms of financing. They come to us because debt factoring can be handled so much more quickly. There are other advantages as well:
- As-Needed Financing – Companies can utilize debt factoring only as needed. When they don’t need access to fast cash, they do not utilize it. It’s there the next time they need it. With some other types of financing, companies can be locked in for years.
- Easier Access – Debt factoring companies tend to make application and approval as easy as possible. A streamlined application process gets things taken care of quickly and efficiently. The chances of approval are high as long as all the company’s ducks are in a row.
- No Collateral – Because debt factoring involves selling a legal asset to the factoring company, there is no collateral involved. The sold invoices are their own collateral for all intents and purposes.
Again, debt factoring isn’t always the right solution when small businesses need to finance. So it’s important that business owners look at both sides of the coin.
Debt Factoring’s Cons
Debt factoring does have its downsides. There aren’t many, but they do deserve a proper amount of attention. At the top of the list is cost. Debt factoring is a financing tool, but it is not free. Factoring companies charge for the service they provide. When companies sell their invoices, said invoices ultimately lose some value because the factoring company needs to charge its fee against them.
A second con is invoice liability. Factoring companies are not collection agencies. Ultimately, business owners are still liable for the invoices they sell. It may be necessary at some point to buy back an invoice or trade it for another of similar value in the event that the original customer doesn’t pay.
This leads us to the third con: having to put a certain amount of trust in your customers to pay their invoices on time. A failure to do so not only jeopardizes a customer’s relationship with you, but also your relationship with your factoring partner.
Though debt factoring’s cons are just as real as its pros, the pros of debt factoring outweigh the cons more often than not. So much so that debt factoring has been a viable financing tool for hundreds of years. Companies like ours have been helping companies like yours with quick access to cash based on unpaid invoices. If you would like to know more, give us a shout.