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Can Factoring Help My Business get out of Debt?

The recession may be a frightening time for individuals but it can be a far worse prospect for many businesses. This may be a time of opportunity for some new and smaller businesses but, for many, it is a time of uncertainty. It is hard to get consumers and business customers to spend money and hard to predict their buying habits at any given time.

The fact is that many viable businesses will go under during a period of recession. Some may have the potential to do well in the future but simply don’t get the chance to make it work in the short term. Others may actually be doing OK but find that external factors push them under.

Many times this is down to cash flow. A business can be doing great in sales terms but, if it cannot get in the money that it is owed, then it puts itself at risk. This is especially the case if the business relies on its cash flow to service regular debts and, let’s face it, most businesses will do this at this kind of time.

So, we see potentially profitable businesses go under simply because they cannot get their customers to pay their bills on time. They may well be in profit on paper but if the cash is not there when it needs to be then this may count for nothing. Is this the case with your business? Then perhaps you should look at whether factoring could help you out.

is a financial solution which can be used to streamline the cash flow within a business and to minimise problems caused by non and late payment of invoices. Here, your business will simply pass on the business of chasing your customers to get them to pay their bills to a factoring company. So, you don’t need to worry about doing that any more.

Factoring basically involves you ‘selling’ your invoices to your factoring company. They will advance you a percentage of their value and will then take them off your hands to get payment. Your customer will then simply pay your factoring company and they can turn a profit by the fee that they charge for managing this process for you. What is left over at this point is then paid back to your company.

The only changes here for you are the fact that you will have to direct your customers to make their payments to the factoring company and not to you on your invoices. You will also hand over debt and credit chasing to the factoring company once you have signed up with them in most cases depending on the agreement you have with them.

You do get less back from a factoring company
than you would if you ran your own accounts on your own but this may be worth doing for many businesses. This kind of deal allows you to get money moving into your company on a regular basis which is not something you might have been able to do on your own, especially if you are a small business.

In general terms this will make it far easier to run your business, to service any existing debts and to avoid new ones. You will have a constant cash flow so that you can meet your own obligations and you’ll be far less likely to borrow on the basis that your cash flow has stalled.

Many businesses also find that the cost of factoring is also easily absorbed over time. After all, if you have to employ specialist staff or use the time of existing personnel to chase up the payment of invoices then this will, in itself cost you money. It may well be that using a factoring company could even work out cheaper in some cases.

Before you choose a factoring company it is wise to make sure that you choose one that can offer you a service that suits your needs. This isn’t just about the fees charged but the services that they offer you. Issues to look at include:
  • What percentage of your invoices will you be paid? You can expect advances of up to around 85% here.

  • Will you have to work with a credit limit? Will the factoring company impose a limit on the payments they make you, for example?

  • What kind of notice period will you have to accept? Due to the drawn out nature of the invoicing/accounts process many factoring companies will want you to agree to relatively long notice periods.

  • What does the company do if a customer doesn’t pay? There are two options here – recourse factoring and non-recourse factoring. If you sign up for recourse factoring then your factoring company will not work with bad debts. So, if one of your customers does not pay then the factoring company will give you back the invoice and you’ll be asked to pay them back the advance they originally gave you. Non-recourse factoring will take on bad debts so you won’t need to give any advances back but you will generally find that this costs more.

If you are having cash flow and money management problems then factoring could be an ideal solution to help your company cope on an everyday basis. With a factoring agreement in place you can get money advanced from an invoice in days. The fees involved may be a small price to pay for the peace of mind that this may give you.
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