There are many reasons as to why a company would consider factoring receivables. Here are 5 reasons when factoring is ideal.
1. You Want to Raise Money Quickly
One of the biggest reasons why a business would sell their accounts receivables is to get quick cash. The factoring company usually gives you a reduced amount of cash for your accounts. They earn a profit as they collect the money from your customers and you get quick working capital to buy inventory, expand operations or use on whatever you want for your business. In this financing agreement, the receivables act as collateral. This is also a good way not just to get working capital, but to free the capital that is stuck with debtors.
2. You Want to Get Money Without Increasing Your Debt
Debt becomes necessary for business operations. However, accumulating debt can hinder your ability to raise working capital in future. Some lenders may also restrict companies from taking extra debt. Companies with large amounts of debt are not able to grow as well as those without debt. In order to avoid all these issues, the best option is factoring receivables.
3. You Want to Reduce the Amount of Time it Takes to Collect
Many companies find that they are paid months after they have delivered services when they have bills to pay such as rent, payroll, and even funds for expansion of their business. Factoring receivables helps cure the problem of debtors and transfers the risk to another party. In most cases, factoring companies are more skilled at debt collection than your company. You will want to take advantage of this expertise. If your company has a large list of clients who have not paid you for your services, then this is also a way to make sure they pay.
4. You Don’t Qualify for a Bank Loan
If you don’t qualify for a bank loan then factoring will enable you to get the money you need for business use because it is a form of a secured loan from the factoring company. You might be unable to qualify for a loan because you already have too many loans, or have had an issue repaying loans in the past and banks refuse to give you any more loans based on your bad credit history.
5. Your Company Doesn’t Have a Collection Department
Small and medium-sized businesses do not have a collection department whose specialty is dealing with defaulters. The factoring company acts as an outsourced debt collection department because they help you collect your debt and pay you an advance at a fee.
If you are in any of the following situations, then you can factor receivables to get quick money.