How Does Debt Factoring Improve Cash Flow?
No matter the size of your business, managing cash flow is an essential part of being successful. Many business owners need help doing this in the beginning, as smoothing out cash flow cycles can be overwhelming for their budget. Luckily, debt factoring is one of the things that can make this process much more manageable.
What is debt factoring, you may ask? Well, we will answer this and many other questions about it below. Read on.
Debt Factoring Definition
Debt factoring is a financing option that allows you to sell your outstanding customer invoices to a debt factoring company. These companies buy those invoices, giving you about 85% of their value immediately. You get the rest when the invoice is paid for by the customer. Of course, the companies deduct a certain fee from the remaining 15%.
Why Do You Need Debt Factoring?
Selling any goods or services works in a simple manner. You make your product, use your resources, pack it, and get it ready for customers. Then, a customer orders that product, and you agree on a particular time during which they will pay for what they have ordered.
In the case of companies selling any kind of product, this period can last anywhere from a few weeks to a few months. So, you essentially send out your products and use your resources, but you do not get paid for it immediately. You only receive funds whenever the invoice is due.
The problem with this system is apparent. You spend money making, sending, and delivering goods to customers, but you don’t get paid for it immediately. You have to keep production going, and you have to attract new customers, even though your cash flow isn’t regular. Besides, you don’t have a guarantee that the invoices will be paid at all.
Luckily, debt factoring can help solve all of these problems.
How Debt Factoring Can Help You
You Get Money Immediately
Put simply, debt factoring ensures you get paid for your goods as soon as you send them out to customers. Thus, you will have enough money to keep the production going until your money is due. You will be able to pay your employees, buy new resources, and invest in your company in general.
It Offers Protection Against Bad Debt
Debt factoring is also a fail-safe in case your customers do not pay the invoice. Most debt factoring companies take the risk of bad debt onto themselves, meaning that you won’t have to pay the money back even if the customer doesn’t pay. Of course, they will not pay you back the remaining 15% of the value of the invoice, but that is miles better than getting nothing.
It is a Simple Solution
Finally, debt factoring is an excellent solution for cash flow problems because it requires no banks. Getting loans or business financing can often take months, and the interest rates are usually high. Besides, acquiring funding from a bank requires extensive credit score checks, making small businesses ineligible.
Debt factoring eliminates all these issues. It is a quick and affordable way of improving your cash flow that allows you to keep your business afloat and cover your expenses. In addition, the fee you pay to factoring companies is often relatively low, so you do not lose a lot of money in the end.
So, What Is Debt Factoring?
As you have read, debt factoring is a financing option that can improve your cash flow and keep your business running smoothly. We hope that this guide helps you understand the basics of the matter and helps you look for debt factoring companies. That way, you will be able to make the best decision for your business.