4 Benefits of Factoring Finance for Businesses

by Gopal Gidwani on April 20, 2017 · 0 comments

in Financial Planning

Quite often, businesses that offer credit to their customers may not receive payments on time. Therefore, firms need to use persuasive techniques to ensure that customers pay them the owed money. This, however, entails an investment of time and money. In order to overcome such a problem, some businesses resort to a financial method known as factoring.

Understanding factoring
Factoring is a financial transaction wherein a company sells its accounts receivables to a third-party funding source, so as to raise capital for smooth business functioning. The third-party financial firm, also known as the factor, charges certain fee or commission and pays the company around 70% to 90% of the total amount of receivables owed. Once this is done, the factor is responsible for collecting outstanding payments and invoices from the company’s customers.

Factoring is a suitable financing method for companies, such as clothing manufacturers, who have long-term accounts receivable. Generally, factoring firms provide their services to companies that sell products and services to other companies, which are B2B businesses.

Following are four reasons why firms should opt for factoring to raise capital.

  1. Offers liquidity

Generally, firms collect their account receivables from customers within 30, 60, or 90 days. In the case of urgent requirement of capital, businesses have to wait for the stipulated time period of 30, 60, or 90 days to receive finance. Factoring, however, ensures that the company receives immediate capital without having to wait for a few months. Hence, factoring helps firms address their liquidity needs easily.

  1. Saves time

Investigating a customer’s credit record, managing collections, sending reminders for payment, and handling credit procedures are a time-consuming process. By availing of factoring finance, businesses may save significant time. The saved time may then be used to focus on the core aspects of the business. Firms may, therefore, channel their time to develop business plans and create a competitive advantage, instead of investing time in making collections.

  1. Does not involve debt

Factoring is not considered as a loan. Neither the company nor the factoring firm issues or acquires debt during the transaction. In factoring, funds are merely provided to the company in exchange for its accounts receivables. Therefore, the company does not face the liability of debt.

  1. Helps in smooth business operations

Capital is required for smooth functioning of business activities. Finance is required for meeting working capital needs and also for growth and expansion activities. An irregular cash inflow results in interrupted business operations. As factoring generally ensures that funds are released within 24 hours of purchasing accounts receivables, firms have timely access to capital.

Businesses may, therefore, enjoy the benefits offered by factoring. It is, however, important to go ahead with factoring only if such a financing method is right for the business. Firms may also apply for business loans as several financial institutions offer attractive interest rates and flexible repayment plans on such loans. Other funding options include crowdfunding and venture capitalists, besides many others. The key is to identify the needs of the business and choose the right finance option accordingly.

Leave a Comment

Previous post:

Next post: