Improving Cash Flow in Business: Using Debt Factoring Companies
One of the fundamentals of a sound business model is maintaining adequate cash flow; poor debtor management can often be one of the underlying causes of low cash flow. One solution to improve cash flows is to consider the use of a debt factoring company.
Improving Cash Flow in Business: What Is Debt Factoring?
Debt factoring services provide financial institutions or, more usually, a company or specialist agent whose sole purpose is to provide debt factoring services. The factor acts as a third party in the credit sales process between the buyer and seller of a given product or service.
In essence, a factoring company will handle collecting an organization’s credit sales based upon invoices submitted. Where a factoring company is using, debtors will pay the invoice directly to the factoring company. In return, the seller will draw upon a certain percentage of the invoice with immediate effect.
Improving Cash Flows in Business: The Advantages and Disadvantages of Debt Factoring
The significant advantage of debt factoring is simply one of the improved cash flows. Credit sales, which are made without a factoring company, can sometimes take months to convert into cash. However, a certain percentage of credit sales value can realize with immediate effect by using a debt factoring company. Besides, a debt factoring company may also save a company significant amounts of time chasing up bad debtors and demanding customers.
On the other hand, the disadvantages of debt factoring may be relating to cost and risk. On the one hand, all debt factoring companies will charge for their services; this charge is often made as a percentage of the factored debts handled. Secondly, there is the question as to the responsibility for bad debts. A debtor does not pay; some debt factoring companies will charge this amount back to the client. It may cause cash flow problems, where a factor has already issued a credit against an invoice, which must subsequently be paid back.
In summary, debt factoring is an excellent way to improve cash flows and reduce the administrative burden associated with debtor management in the short term. However, such benefits come at a cost, which means that a company will not realize its credit sales’ full value.