The Pros and Cons of Invoice Factoring

By: Ryan Attelle

Invoice factoring in short is a service that provides a means for a business to sell there receivables to a third-party so that they can get paid quickly and improve cash flow. Like any financial service there are both positive and negative aspects to invoice factoring. This article provides a quick overview on the pros and cons of invoice factoring, and weather or not is it right for your business.
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To reiterate, main purpose of invoice factoring is to provide a service that creates a means for a business to sell there receivables to a third-party. This is so that they can receive fast payment on outstanding bills. In many cases this service can be provided on the same business day. This of course comes at the price of an exchange or transaction fee. Many view invoice factoring as a way to dramatically improve a businesses cash flow. In stead of having to wait 60 to 90 days before getting paid, factoring can grant businesses access to there funds virtually instantaneously.

First lets take a look at what makes invoice factoring so attractive to many businesses looking for financial relief. Invoice factoring arrangement are typically very simple to set up. Usually it just takes some initial paperwork to get the process started, and an established agreement can often be reached in no more than a few business days. In fact setting up an invoice factoring agreement is probably easier that collecting on your receivables them self's. Almost all business owners would agree that collecting on receivables is one of the most difficult, better yet time consuming tasks. An invoice factoring provider can get a business out of the need to focus on collections. This allows them time to concentrate on better serving there customers and fine tuning there business. Another reason why invoice factoring is so popular and attractive is because it accumulates no additional debt for a business. Lastly many business owners find that factoring allows them the opportunity to take advantage of business opportunities when they present them self, as a pose to not being able to move on a great deal. This in mostly due to the fact that they are no longer waiting to be paid. This makes it possible to make improvements to equipment, buy new materials and supplies, even hire new staff.

Of course with almost anything these days there are some downsides to invoice factoring. Some find it inconvenient that through invoice factoring the amount available to there businesses is always in directly correlation to the amount of money that is expected to be paid on the invoice that is outstanding. It is important to keep in mind that any funding arrangement and the amount provided is based on the ability for a business to repay the amount loaned. The percentage rate for invoice factoring will very from business to business. The amount a business is charged is often determined by both there own credit rating, and the credit rating of the companies whose invoices are being submitted for factoring. So if a businesses clients credit is bad it could cause for a higher factoring rate. As with anything else a business needs to make wise judgment calls in regards to which invoices they choose to submit for factoring. It is important to understand that fees will increase the longer an invoice remains outstanding. This means that factoring some invoices can potentially do more harm than good. As long as a business is smart about choosing which invoices to factor there should not be a problem but many find this aspect to be discouraging.

It is always important to do research before jumping into anything. Not all invoice factoring providers are created equal, so its important to find the right fit. And invoice factoring it self is not right for every business. Carefully weighing the pros and cons can help determine if it is right for your business.

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