Factoring Services

Written by Linda Alexander
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Factoring services accelerate the collection of your receiveables, thus improving your profits while gaining control over your company. They deduct a factoring services fee, usually between one and five percent of the invoice, and pay you the balance of the invoices right away. When the invoices become due, they collect from your customers.

For businesses that are asset rich and cash poor, but strong in creditworthy receivables, this can be a great way to generate cash flow. It is easier than getting a bank loan, since loans usually depend on your business assets. When you own a small business, it is not always easy to get financing. It might cost more than bank loans, but sometimes factoring is a better choice for growing businesses.

Advantages of Using Factoring Services

You might not be willing to sell off part of your business to venture capitalists, and you might not have significant assets. However, most businesses have receivables. The advantage of using factoring services is that you gain capital without having to increase your debt or give up equity on your company.

Usually, the factoring services will advance 50 to 80 percent of the upfront value of the receivables. After they collect the balance, they deduct their fee and give you the rest. It often costs more than a loan, but if you need cash flow, the welcome capital often improves your profits based on the ability to handle additional new orders.

Another benefit is the fact that you do not have to collect on your bills. If your customers are late payers, chances are you would rather do more important things than get on the phone and go after unpaid balances. Factoring services can free your hands of the paperwork hassels and backend bookkeeping to take care of other business or pursue new clients.

Disadvantages of Factoring Services

Selling your accounts receivables has a stigma attached to it because in the past, only failing businesses took advantage of these services. The stigma is lifting, but it is happening slowly. It's important to choose a reputable firm to ensure that they handle your accounts with discretion.

Some firms work with small businesses while others stick to large corporations or a combination of both. Be sure that the service you choose is compatible with your own business. The amount of time you use the service may also vary. Some companies do it to get out of a pinch, while others prefer it on a long-term basis to even out their unbalanced cash flow.


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