Has your small business been struggling with slow cash flow? You’re not alone in that — around 60% of companies have this problem. Since slow cash flow can ultimately kill your business, it’s certainly not something you should ignore. But what can you do to improve it? Well, we think the solution is debt factoring.
What Is Debt Factoring?
In a perfect world, selling a product or a service would be quite straightforward. You’d charge your clients, and they’d pay you right away, giving you the funds necessary to cover your expenses and keep your business running. Once you’ve taken care of the necessities, you could use the rest of the cash to expand your company. And isn’t that what all business owners strive for?
Unfortunately, our world is far from perfect, and most customers won’t pay you right away. If anything, extending credit to your clients is quite commonplace and may even help boost your sales. But there is a huge downside — you can’t use the money that’s owed to you until the client finally pays out. That can seriously impact your cash flow and even lead to insolvency.
Luckily, there are ways to avoid such a fate — and one of them is debt factoring. To put it simply, debt factoring is when you sell your accounts receivable to a third party. This third party (usually a bank or some type of financial company) then pays out immediately a portion of what the customer owes to you. Once the client actually clears their debt, you’ll receive the rest of the money, minus the amount that goes for factoring fees.
Debt factoring is by no means a new concept. In fact, evidence shows that it dates back all the way to the 15th century! Nowadays, it’s far more developed and common, though, even if business owners often overlook this option.
Debt Factoring Pros
If you’re an experienced entrepreneur, it might be fairly easy to see how debt factoring can help your business. But those who are new to the whole concept may struggle to fully grasp why they should sell their invoices. For that reason, we’ve compiled some of the debt factoring benefits below.
You Get Cash Right Away
Your client might choose to pay you only after 90 days, but you don’t have to wait for your cash that long. In fact, most factoring companies take about one or two weeks to perform the necessary checks and send you an offer on their fees. And if you’ve worked with that same company before, you’ll receive the money right away — after 24 hours at most.
Then, you can put those funds to good use by covering your expenses or investing them in your business. That way, you’ll take care of your company’s needs immediately and keep your cash flowing.
You Don’t Have to Collect Debt
One of your more unpleasant and tedious responsibilities is, without a doubt, debt collection. Some customers ask for payment extensions, others might be tough to reach, and some may not pay at all. On top of that, debt collection takes time and resources that you’d probably rather invest elsewhere.
But when you sell your accounts receivable, you give away the debt collector’s responsibility too. Now it’s up to the factoring company to collect payments from clients, while you can just sit back and wait for the rest of your money to come in. Of course, this service comes at a price too, but it’s small enough to pay for what you get.
However, in certain states, you don’t give up your responsibility for debt collection entirely. In the event that a customer doesn’t settle their debt, that obligation falls to you. That way, factoring companies protect themselves from losses and potentially bad investments.
No More Stress
It’s no secret that delayed payments can cause quite a bit of stress. You may find yourself tossing and turning at night, wondering if you’ll have enough to pay your company bills. Anything more than that, such as expanding your business, is nothing more than a pipe dream.
But with debt factoring, things will completely change. First of all, bills will no longer keep you up at night, nor will you spend hours trying to figure out how to pay your workers. On top of that, you’ll finally have enough money to scale your business. Being an entrepreneur won’t be stressful; on the contrary, you’ll feel excited to see what’s to come!
Debt Factoring Cons
Despite all its benefits, debt factoring does have a few drawbacks. So if you’re thinking about giving it a try, you should at least be aware of what those are. And we are more than happy to help!
As you might have guessed, factoring companies don’t give you quick cash free of charge. Every time you sell them an invoice, you do so at a discounted price. So once your client finally pays up, debt factoring companies keep the difference between the full cost and discounted one for themselves.
While you can negotiate the discount, it’s the factoring companies that usually decide on it. Typically, their fees amount to around 5–10% of the full price. That may not seem like much, but it can turn into quite a large sum if you keep factoring debt throughout the year.
Possible Loss of Customers
As the company’s owner, you care about the relationship with your customers and try your hardest to cultivate it. For that reason, you might sometimes show leniency and allow payment extensions when you’re collecting a debt. Your preferred clients may even get further perks and compromises.
On the other hand, factoring companies have no reason to care about your customers. It’s in their best interest to collect the money as quickly as possible, which isn’t always pleasant. Obviously, such an approach can damage the relationships with your clients that you’ve worked so hard to build. So be careful when you’re choosing a factoring company!
If you’re feeling restricted by your slow cash flow, debt factoring might be just the solution you’re looking for. Though often overlooked, it’s a perfect way to get money circulating and bring some change to your business. So don’t wait around for your clients to finally pay you — find a good factoring company today!