When you should consider factoring

Factoring is something many small businesses use to improve their cash flow and finance their business. What is factoring? Factoring is the process of selling your accounts receivable invoices to a third party who then is in charge of collecting on the invoice. You get paid, and the account is out of your hands, but you take a discount on it. Factoring is a great method to expand operations.

So, now that you know what factoring is, and how it could be useful, but let's now look at when you should take that discount on your accounts in order to collect on them. In other words, when should you consider factoring? You should consider factoring when you notice your cash flow is starting to decrease and your past due invoices are pilling up. There are a lot of incentives for factoring. The following are a few of those incentives:

1. Cash Flow - Factoring allows you to sell invoices to a third party at a discount, thereby giving you money now to pay your expenses. When you run a business you have to pay employees, buy merchandise, pay your overhead, and more. So, if you factor out your accounts receivable, then you now have that money to use as working capital. Time is money, and this means no waiting.
2. Financing alternative - Factoring is a powerful funding tool for supporting growth. It can be very costly to cover and carry the expenses for your clients. Waiting 60-90 days to get paid can cost you a fortune in lost potential. This means having money to grow your business right away.
3. Cash on hand now - Factoring allows for funds to be in your account quicker than waiting for invoices to be paid. It also means having the money you need to pay your own bills, and buy new products.
4. Simple to use - Factoring is easy to use, it means not having to pay for a credit collection agency, instead you let someone else take care of it.
5. Leverage staff time - Factoring assures that who you do business with is credit worthy, it means that you get paid, no mater what.
6. Professional Visibility - Factoring allows for invoices to be collected in a professional and consistent manner. It means staying above water in the business world.
7. Success Factor - Factoring is a step up the financial ladder to improving your overall cash flow, and in business, cash flow is king. You do not grow, you do not improve, and you do not find success if you do not have the money to do it.
8. Funding Capacity - Because factoring is selling accounts that should have already been paid for, and so in essence, money you should have, it does not use personal assets as a way of funding companies. It is not a loan, it does not have to be repaid, and it does not count against you in debts, etc.
9. No funding limits - Factoring does not have a limit on qualified invoices, unlike a loan it does not have a capping off point. Instead you can sell as many, or as few as you want.

So, what does this mean? It means that you should consider factoring when a conventional loan is not a better option. It also means that any time you need a better cash flow situation, or your carrying costs on your invoices or collections gets too high, then factoring is a great option.

One of the great things about factoring is that it does not tie up assets outside the business and does not involve repayment of debt so it is a one stop solution. You can do it once, or a hundred times.