The customers who support your business are some of the most valuable assets you have. Naturally, there will also come times when your clients hold you back in other ways. Should you provide services to a customer and not receive payment for your work, it can lead to other financial setbacks for your business. In order for you to keep your company operational, you may wish to look into how factoring your invoices can stimulate cash flow. Review the pros and cons of this financing solution to get a feel for whether it is right for you.
What Is Factoring?
Accounts receivable financing is a service aimed at solving the problem of unpaid invoices. A lender will look at your invoices as assets and evaluate which qualify for the service. These invoices will be bought from you and the lender will pay you a portion of the total value as an advance. After the lender collects the debt from your customer, you will be responsible for paying a fee and the lender will give you the difference on what you are owed from the invoices.
As mentioned, factoring your invoices can be a fantastic way to stimulate cash flow. When you are waiting around for a client to pay you for services, it can create some major disruptions to the supply chain. If you want to keep a positive reputation with your clients and vendors, it is best to make sure you don’t allow a simple setback with your capital to destroy you. Additionally, accounts receivable financing can be advantageous over other financing options like taking out a loan because it is an advance and won’t cause you to sink into debt.
There are also a few drawbacks to keep in mind when it comes to AR financing. In some cases, the fees attached to the service can be significant. Before you agree to use the service, be sure you know exactly how much you are going to be required to pay. Many business owners find that it is more beneficial to wait for a client to pay than to be forced to pay a fee for AR financing. Additionally, you need to make sure your invoices qualify. Only select invoices from established clients will be eligible for the service.
Alternative financing services like factoring offer your business the chance to get through difficult setbacks to the budget. Learn more about AR financing to determine if it is the best solution for your current predicament.