Everything Business Owners Should Know About Factoring

If you’re a business owner and have been looking into the many options for financial support for your company, you’ve probably stumbled across the term “factoring” before. However, because this isn’t the most popular lending arrangement out there, you might not know exactly what this financial option entails for your business, or what it has to offer.

Simply put, factoring is an arrangement in which you as a business owner promote better financial stability within your business by selling your accounts receivables to a financing company. This way, you’re not waiting weeks or even months on clients and customers to pay their bills, and can instead benefit from the cash garnered through your sales right away.

Overall, this is an excellent move for many small companies, as it allows owners like yourself to keep up with the demands of payroll, keeping up inventory, investing in growth and development of the company and much more. This is typically used as an alternative to bank loans for businesses that don’t quite have the finances to qualify for a traditional loan from their bank or other investors. While you’ll typically be receiving slightly less money overall during this type of arrangement (because the financing company usually takes a small fee), you’ll be getting the money you need more quickly, so your cash flow remains healthier overall.

While factoring can be a real dream come true for many smaller operations, this type of financial arrangement also poses several risks that you should address before deciding whether or not this is the right route for you to take. First and foremost, not every financing company offering this service is on your side, and you may need to shop around to ensure you’re working with a company that’s not going to cheat you out of your hard-earned cash. This, paired with high interest rates, can make the arrangement seem stressful in some cases.

Furthermore, it’s important to remember your customers and clients while undergoing a transaction of this variety. You are effectively placing the management of your customer’s invoice into the hands of a new company. While you’ll no longer be responsible for collecting payments from your customers, they will likely still hold you responsible for the way the financing company treats them or interacts with them throughout the billing process.

Factoring can be a real life saver, but there are several risks and other aspects you should check out before adopting this arrangement into your own business.

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