Usually, it takes a period of about 30 to 60 days for a company to receive cash on their receivables or invoices. However, if a business wants to get cash from receivables and invoices quickly, it can sell these receivables or invoices to a financial company (third party) known as a factor. The factor will now be left to collect payments from the business’s clients. Here are the benefits of factoring receivables:
1. Credit Screening
When your business factors receivables, it obtains its clients’ credit information from its factors. As a business person, you will, therefore, have the ability to make sound business decisions on who to do business with and which clients to avoid on account of the chances of becoming delinquent. This protects the business from unnecessary losses.
2. Faster Invoice Payments
Factors often report payment details to credit agencies. This is a general report regarding the payment of the invoice. Companies (your debtors) will, therefore, try to settle their debts as fast as possible to avoid the consequences of being reported.
3. Personal Guarantees Are Not Required
As a business, it’s not mandatory that you guarantee the payment of the factor by the customers – at least not personally. You don’t have to guarantee against the client’s inability to pay. All you have to guarantee against are disputes and cases of fraud.
4. Factoring Is Fast and Easy
No projections, business plans, financial statements, or tax returns are required to factor. Unlike other types of financing where you may be required to provide up to several guarantors, there is nothing of the sort when it comes to factoring. Company principals don’t have to guarantee repayment.
5. It’s Not a Debt
Note that factoring is not a loan. Just because it’s a form of financing, many people just assume it’s some kind of a loan and try to avoid it. However, that’s not the case. You factor your accounts receivable, which is typically your money – it’s only that you need it faster than the debtors are willing to pay.
6. Eliminate Bad Debt
Bad debt can cause major liquidity problems for a business. A non-recourse factor assumes bad debt. Factoring eliminates the expense from your business’s income statement.
The banking sector has continually downcasted the practice of factoring. As a result, a lot of people are afraid to try it. For that reason, most people aren’t aware of the positive aspects of this type of financing. Hope this article has cleared things up.