The accounts receivable side can be an important aspect of just about any business, large or small, however; it can be an especially critical factor in a small business where margins are thin and operating budgets don’t have much wiggle room. Outstanding and uncollected invoices can squeeze cash flow, and can make or break an operation’s ability to operate effectively.
This is where accounts receivable factoring could come into play and make life within a small business a little bit easier. While factoring might not be an option for every business, there are certain advantages to such a system that could open up more opportunities for a small business than if it were left to collect upon its own receivables.
What Exactly is Accounts Receivable Factoring?
You may have heard of accounts receivable factoring, but don’t know exactly what it entails or how it could possibly help your business. Factoring involves a third party being employed to collect a business’s outstanding invoices, but this is different than the typical collection agency. Instead of waiting for money to be collected, the collecting institution, otherwise known as the factor, will pay a large portion of the outstanding invoice to the business up front (since the invoice is akin to an asset), with the remainder being paid once it has collected upon the invoice. This is done in return for a fee paid to the factor. In essence, the business sells its invoices to the factor at a lower value than what they are worth, and this allows the business to get on with life so to speak without worrying about internal collection efforts.
Why It Could Work For You
Determining whether factoring could work for your small business can hinge upon a variety of factors. The number and size of outstanding invoices you deal with, how long these invoices are outstanding, quality and consistency of customer payments, as well as the level of cash flow needed to sustain normal operations for your business could all play a part in determining whether factoring would be a service to consider.
If you have regular customers who pay on a consistent and timely basis, or most of your business is conducted in cash, checks or credit cards rather than invoices, there may be very little need for factoring. However, if you consistently find your business is lagging in its collection efforts or is in a cash flow crises because of unpaid invoices, factoring could be an option.
There may be several major advantages to making use of accounts receivable factoring. First off, while factoring can cost your business money, so can employing a controller or accounts receivable person to collect upon your invoices, and if you have to collect them yourself, you could be wasting valuable time that may be spent more productively and profitably in other areas.
Secondly, you largely remove the risk of being “stiffed” on payment by those to which you have offered credit. By utilizing factoring, you can move much of the risk of non-payment over to the factor and let them deal with having to collect upon the outstanding amounts.
This brings up the third major advantage — reduction of stress. The time, effort, and stress that can accompany the collection or attempted collection of outstanding invoices can be immense. Having the peace of mind that factoring can bring to the table can be a pleasant addition among the many other stressful aspects of small business operations.
And lastly, since your business receives a large portion of the invoiced amount up front, it can increase cash flow and allow your business to quickly put that money to work in other areas.
There may however be a few disadvantages to factoring. Your business might not have enough in receivable invoices to make factoring worthwhile. Or if you have a set client base that pays regularly and reliably, you may not need such services. And even if you fall into the occasional missed invoice, late payment, have to utilize a collection agency once in a while or even write off an invoice every so often, this still doesn’t mean that the amount you lose in such situations would compare to what you might pay a factor for its services. So consider carefully before jumping into the factoring realm. While it might be right for some, that doesn’t mean it’s right for every business.
Danny is a veteran commercial lender with over fifteen years of experience in accounts receivable funding. For more information on how to grow your business with the right funding company visit https://www.factorfunding.com.