The Pros and Cons of Factoring on your Small Business
If your business needs fast access to cash, factoring is the most efficient way for immediate funding. Factoring is a straightforward arrangement in which a third-party organization, commonly referred to as a factor, purchases the accounts receivable of a business, and credits the business with cash based on the valuation of the unpaid bills.
Then, the third-party collects the receivables owed to the business to compensate for the advanced cash.
Factoring facilitates fast access to cash for the maintenance of cash flow necessary for daily operations. It is also known as second-tier-financing in some industries in which it is commonly practiced.
The advantages of factoring:
Factoring is a time-efficient financing method, which allows you to borrow money fast without filing lengthy paperwork that is typical when borrowing from institutional lenders.
Good for emergency spending
When in need of instant funds to keep business operations running or boost sales, factoring provides a fast solution to attain your business goals. It also helps you take advantage of a new opportunity that you cannot afford to let pass, for instance, the acquisition of a competitor business on offer at a bargain price.
Unlike traditional loans, factoring does not demand your property as collateral for funding. Therefore, it is low risk and easy to secure.
Disadvantages of factoring:
Poor Public Image
Since factoring involves a declaration by the factor to a business’s customers, the alert may result in a poor public image for the borrower. Customers may take it a sign of a financial crisis.
Factoring requires you to hand over your receivables to a factor. As a result, the factor could rule out doing business with some customers if they deem them too risky if they have a poor credit rating.
Although factoring is a godsend for businesses in need of urgent cash, it costs more than traditional loans. Your business could end up paying about thirty percent in annual interest. Besides, the factor keeps one to four percent of your receivables as the fee for the funding.
Contact ASA Capital Funding to learn more about factoring.