There are a few nuanced benefits accounts receivable financing will bring in the form of organizational assistance to your operations. The first one being there is no long term liability on your balance sheet. No loan that needs to get paid off because you have already sold your loan – the invoice, to the factor. This relieves the stress of making loan payments and ultimately retiring the debt. Invoice factoring goes invoice to invoice and you stop and start as needed.
Another is closer to the operations itself. The factoring company is providing credit management on all your customers you are considering for invoice factoring. We make a decision on the credit availability of each account debtor aka your customers. This assures that you are not extending credit to a company who statistically might default on payment. Additionally, we verify with the customer that the invoice has been accepted in their payables system. This avoids any later issues like; “we never saw the invoice” or “we didn’t get what we ordered” or “you didn’t do the job correctly.” Excuses like these that customers use to slow down making a payment are eliminated during the verification process.
And finally, a conventional line of credit from a bank is based on the borrower’s ability to pull from the line AND subsequently make deposits to replenish it. Unfortunately what happens with many business owners is, they lack the discipline to make those deposits from their income to keep the line effective. Too often the borrower chips away at the line, taking money out and putting some or most but not all of it back as income rolls in. This allows the line to start to dwindle with a semi-permanent outstanding amount due to the bank.
Factoring alleviates this problem because, again, it’s invoice to invoice. The borrower submits an invoice for funding, the factoring company wires money into their bank account, the customer pays the factor back through the normal process of paying the invoice and the transaction is retired. Thus the factoring provides the discipline to put funds in use and retire them automatically.
So unlike other forms of commercial finance, factoring is a very hands-on form of working capital that offers more than the capital – it helps your company grow in a more optimized fashion. This is not to infer that factoring is preferable to bank finance, it is though a good tool to use for the proper situation.