Extending your customer’s credit can be a good way of boosting sales and securing them. However, the fact is that while your customers take their time to pay you back, you may have to encounter a pressing need for cash for maintaining the liquidity of your business. For example, you may need the cash to restock, pay for utilities and overheads, pay your suppliers, your employees, etc. So, what will you do if you find yourself short of a decent cash flow?
Well, before you start worrying about it, how about considering the process of factoring to avoid a cash flow crunch? But let’s first dive into what factoring really is:
What is Factoring?
Alright so let’s assume you’ve successfully made a sale and also decided to extend the customer’s credit and that he’ll pay you back the amount owed in an agreeable timeframe. Then you go and make an accounts receivable entry in your books and wait for the payments to arrive. Factoring entails buying those ‘accounts receivable’ which are owed to you as opposed to borrowing more money to cover the costs. Factoring your accounts receivable transactions would enable you get quick cash. On top of that, you won’t have to wait around for your customers to make their payments.
Furthermore, for your convenience factoring companies buy your accounts receivables and titles of the invoices and proceeds to collect the payment owed to them upon the due date of the receivable, which is pretty cool. It is the factoring company that is liable for any costs incurred in the process as well as doing the legwork for collecting the payments.
The Benefits of Factoring
You can get your payments after billing your customer and after the shipment of the product has been made and delivered. However, if you’re on good ties with a factoring company, you can usually get your cash in just 24 hours. But if you’re a first-timer, you might get your cash within a week or two weeks at maximum. This is because factoring companies first evaluate the credit rating of new customers.
You Don’t Owe Anybody Anything
You have to understand you’re actually selling something here and getting cash for it. It is in no way a loan you are taking out.
After you sell the invoice to the factoring company, you are no longer responsible for collecting the payments owed to you by your customers. That is the factors’ job.
All in all, there is no reason you shouldn’t try factoring to improve your cash flow because of the abundance of benefits it provides.