In order to consider invoice factoring as a financing method to grow your business, you must have a handle on the cost structure that goes into operating the company. It’s best to get together with your comptroller or accountant to really figure out if your pricing is what it should be. There may be services you are providing or products you are selling that are not profitable and are creating a drag on the overall growth potential.
Once you have determined the real gross profit margin on your sales, then you can strategize on which form of financing is the best for the business. Accounts receivable factoring may be a great way to increase cash flow to pay labor and suppliers, but if the profit margin is less than 15%, it’s probably not the right revenue model. Companies with thin profit margins and high volumes are not the best candidates for factoring.
A good factoring company will ask about your margins going into negotiations. When using AR to finance growth, it has to work for both of us.