Factoring has become a very integral part of the business world today. The economy that we are operating in today is quite harsh and businesses have quite a number of times found themselves squeezed in a corner as far as cash flow is concerned.
Cash flow is very integral part of any business as without it the day to day operations cannot be conducted. The result has been that businesses are constantly looking for credit facilities like over drafts and lines of credit to help them cater to their day to day obligations. Running too much into debt is however not a good idea as it increases the company’s liabilities. This can also work very well to bring the company down if not well observed.
This is the reason that solutions such as invoice factoring were brought into the market. With invoice factoring, the company will not run into debt and it will be able to get paid for all the issued invoices as and when they fall due. It has been a very good approach and has managed to help quite a large number of businesses to maintain liquidity. Typically, the business will usually find a factoring institution. It will then sell all of its invoices to the institution at a discount. The institution will pay the business cash for the invoices and then collect their money from the debtor to whom the invoice was issued. The discount that the institution is given typically serves as the invoice factoring costs and is usually between 10% and 30% of the value of the invoice.
There are a number of businesses that choose to shy away from involve factoring because of these invoice factoring costs. They look at it as losing money. However as a savvy business person, it is important that you look at the bigger picture. Granted, you will lose that 10% or 30% in the form of fees. However you will be able to get immediate cash and you can continue to run your business and make mo9re money without much strain.
Choosing to wait for the debtors to pay will have you losing more money. The debtors might extend the credit period and here you will start dealing with issues like the time value of money. The debtors might fail to pay and you will have to incur collection costs which will dig deeper into your pockets. You might also be forced to write off some debt as bad debt which will mean that you lose out entirely. In the end you will have lost much more than the 10% you would have paid to the factoring institution.