How much money factoring saves a company will vary by company as the fees and charges billed by factoring companies also vary.
Howbeit, the costs, and benefits can be quantified and compared. Invoice factoring is not an ideal financial alternative for every business. If, for instance, your business raises just a few invoices and clients diligently settle their accounts within 15 days, have it in mind that the benefits you will gain from factoring invoices would be less.
As a small business owner, it is possible to turn your unpaid customer invoices into fast cash with invoice factoring. Have it in mind that this financing alternative is super ideal for business owners whose clients are other businesses. Since these customers rarely pay for goods or services right away, invoice factoring will make available immediate cash for business owners to ensure that the business keeps running efficiently.
One thing to reiterate is that invoice factoring is not a loan. Instead, it is the process where you sell your invoices at a discount to a factoring company in exchange for a lump sum of cash. The invoice then belongs to the factoring company and they get paid once it collects from your customers, typically in 30 to 90 days.
Benefits of Invoice Factoring to Businesses
Aside from that factoring saves money for businesses, it offers many other benefits. Those benefits include;
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Reduced Need for Other Forms of Financing
Once you get into a viable agreement with a factoring firm, have it in mind that you will obtain an initial advance against your current accounts receivable. Have it in mind that the said advance, ranging from 85-95% of the invoice value, will ensure that you have the necessary cash to run the business effectively.
And that float of cash is topped up as new customer invoices are issued. Factoring will in many ways limit or even do away with the need to seek other funding alternatives, such as overdraft facilitates or bank loans.
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Bad Debt Reduction or Elimination
Truth be told, bad debts have become a thing, especially among small businesses. Howbeit, based on this sort of agreement, accounts receivable factoring can reduce or eliminate bad debts. This too, is considered an immense benefit of factoring.
If your agreement is for a non-recourse factoring service, note that the factoring company will become liable for these bad debts.
You won’t have any need to repay advances made to you if invoices are not paid or the debts aren’t collected. Nevertheless, there might be situations in which the factoring company is barely responsible for the cost. In addition, a non-recourse factoring arrangement will do away with the cost of most bad debts.
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Fund Sales Growth
Invoice factoring in many ways does away with the wait for clients to make payment before the business can function properly.
As such, the working capital cycle is reduced massively and more cash is at hand to guarantee that the business will keep serving customers and making more money or more invoices. It simply means that the company can see to the need of clients faster, bolster sales growth, and boast gross profits.
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Reduction in AR Administration Costs
Immediately you hand over your accounts receivable to a factoring company, you more or less ensure that you won’t have to spend a dime on AR administration. The factoring company will be the one tasked with paying for credit checks.
Aside from that, you will no longer have to invest time and resources into chasing overdue invoices. In addition, the expenses that come with sending reminder letters and statements will also be eliminated.
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Reduction in Cash Flow Management Time
Once you leverage the expertise or services of factoring companies, you can be assured that you have obtained most of the cash from sales invoices within 24 hours. As such, cash flow forecasting and cash management will no longer be as stressful and daunting.
Owing to that, you or your finance manager won’t have to spend so much time evaluating the cash flow forecast due to late-paying customers. Aside from that, it will lessen the number of collections calls you get from vendors, and this will also reduce the cash you put into administration.
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Supplier Discounts
You should also note that always having cash to pay vendors brings a lot of benefits to your business. As such, you will be capable of negotiating better prices with vendors or take advantage of early settlement discounts. This better or improved liquidity will boost your business credit score, and this makes it easier to obtain other types of finance at better rates.
Conclusion
Truth be told, invoice factoring can benefit business enterprises that issue an encouraging volume of sales invoices. However, to ensure that you can find out the total value of those benefits, you will have to evaluate your business and ensure it is the right decision.
In many situations, you will discover that the value of the benefits will more than compensate for the cost of invoice factoring. Nevertheless, factoring might very well not be the right path for every business. Owing to that, it is recommended you analyze the costs and benefits prior to signing a factoring agreement.