There are several financing alternatives for companies in need of capital. These may include cards, bank loans, and investors, to name a few. Each of these options has some incredible advantages and major drawbacks as well.
One major disadvantage of these options is the complex process involved in qualifying for the loans if you are lucky to get any. Another disadvantage is the interest rate that accompanies the loans making them difficult to repay. Hence, companies must weigh these disadvantages before going for these options.
One option not included above and which is not used as often as it should is factoring.
Affacturage /factoring is a financial arrangement involving the sale of accounts receivable [invoices] of a company to another party at a discount. It allows the seller to have instant cash flows, which normally would have taken time.
What is a factoring company?
A factoring company buys your invoices from an accredited client, instantly advances your invoice amount, and gives the remaining balance when your clients settle in full. This works best for small to medium businesses that are not bankable to receive capital solutions.
Benefits of factoring
Immediate cash flow
Factoring shortens the cash collection process and offers a quick realization of cash by selling receivables to a factor. The funds are accessible in as little as 24-48 hours once the invoices have been approved. That’s an incredible time frame compared to the time taken to get a bank loan.
Factoring enables a company to finance its operations from its own receivables. The collection and commercial payables time is also lowered, meaning your business financial situation is stronger. You can use your business’ own resources to finance its own needs and boost itself.
Provide payment terms to customers
Most established clients prefer to pay invoices on specific terms. If you can’t provide payment terms, you are less likely to get such clients. Factoring allows you to offer payment terms to customers to finance your invoices immediately after creating them. Hence, you can provide terms without running into financial problems.
Factoring is probably the only source of financing that grows together with your sales. The more sales you make, the more the availability of finances to use, meaning you will always meet demand.
It uses your invoices as collateral
Loans and credit cards often require substantial assets as collateral, including inventory, real estate, etc. Factoring only needs your invoices as collateral.
No debt incurred
Factoring is not by any means a loan, meaning you do not incur any debt. This keeps your balance sheet the way you want it, making it easier for you to receive other financing solutions.
Factoring minimizes your bookkeeping costs and your overhead expenses. It enables you to make cash payments to your suppliers, meaning that you can maximize the discounts and cut your production costs.
Buyer’s credit investigation
Factors offer valuable insights to the seller on the credit status and market reputation of a buyer. It helps minimize your collection risks, develop a good customer portfolio, and negotiate better terms between parties in prospect contracts.