As a business owner, it is imperative that you have a firm grasp of the various financial tools available to you. It is no exaggeration to say that you will find life as a business owner far easier when you fully understand how to leverage financial instruments such as debt, loans, and investments to grow your company faster.
The reason for this is that it puts you at a significant advantage over many of your competitors, who may be forced to bootstrap their business entirely simply because they didn’t realise that there was another way.
Debt factoring – which is when a third party puts money against your outstanding invoices – is a prime example of this. It can literally save businesses from ruin if used correctly.
Cash flow represents the beating heart of a business, and when it falters, so does the company. Unfortunately, many customers will pay their invoices late, which leaves you vulnerable to overhead costs.
To help you decide whether to use debt factoring or not, this guide will explore the positives and negatives of this financial tool.
It improves cash flow
Arguably the greatest benefit of debt factoring is that it greatly improves cash flow. It prevents your organisation from falling behind with its payments, artificially smoothing out your income stream and ensuring you are consistently able to pay your overhead costs.
The significance of this cannot be overstated. In difficult times, it can be all too easy for your customers to fall behind with their own cash flow, which has a knock-on effect. They may be unable to pay for your products and services at the desired (or agreed) time, which means, in turn, you are short on money.
The result is that you can’t pay your staff or your bills as easily, and you are more vulnerable to outside threats.
This is where Debt Factoring comes in. Otherwise known as invoice factoring, this financial leverage can help you get paid reliably on time, negating the risk of late payments.
A finance firm will front the outstanding invoice and get paid by the original customer when they eventually send the money.
Is the cost worth it?
Sure, you could argue that invoice factoring costs – it’s a service, after all. However, the actual costs involved with debt factoring are relatively modest, especially given the benefits to cash flow that this financial solution provides to companies.
Although it is true that when you incorporate debt factoring into your business, a cut of the original payment is handed over to the third-party lender, the advantages of this service often far outweigh the marginal cost for most companies.
If you need an immediate cash injection for your business on a regular basis, then you are unlikely to be looking to stretch out the most profit possible – and debt factoring can be of huge help in terms of keeping your business moving financially, even when faced with late payment or inconsistent customers.
In contrast, if you receive payment regularly without issues, you might only wish to use debt factoring on occasion – that’s the beauty and flexibility of it, plus the peace of mind for business owners.
It boosts growth
Lastly, a great benefit of debt factoring is that it is great for corporate growth. The reason for this is that you have extra cash throughout the month to invest in your business rather than scrambling around to pay your overheads.
What’s more, you will know exactly when you will be paid, making it easier to set targets, take out loans and prevent yourself from being caught out by unexpectedly late payments.