Accounts receivable factoring is often seen as an alternative to traditional loans. However, for businesses that may be unfamiliar with how factoring works, that first statement can be a bit nebulous. Accounts receivable Factoring offers a number of advantages to business owners, from improving cash flow to enabling growth, and more.
1. Factoring is not a loan
While accounts receivable factoring is frequently placed under the heading of “lending solutions,” it is not a loan. Accounts receivable factoring does not require collateral, does not impact business credit ratings, and does not place any debt on the balance sheet. Factoring is a simple exchange of receivables for immediate working capital.
2. Accounts receivable factoring improves cash flow
The success of every business relies on having a strong cash flow. When revenue is tied up in unpaid receivables, cash flow can slow to a trickle, which can impact the ability to cover overhead costs, make payroll, and even take on new clients. Since most businesses issue invoices with payment schedules of 30 days or longer, gaps in cash flow can become a recurring issue. Accounts receivable factoring eliminates the wait by turning invoices into cash and making funds available within 24 hours.
3. Factoring helps businesses build capital
Because factoring is not a loan, businesses can preserve their credit ratings, avoid debt, as well as ongoing interest rates. The improved cash flow means revenue will come in faster and proportional to sales without waiting. This gives businesses a huge advantage because they are not only able to cover overhead, but because of the accelerated cash flow that factoring provides, they are able to build up capital reserves for growth.
4. Factoring puts businesses in control
Businesses assume a lot of risk when they take out loans. Businesses have to put up collateral, take on debt, and make monthly payments on the balance owed regardless of high or low sales. Factoring, by contrast, is simpler, more transparent, and puts businesses in the driver’s seat. Businesses can choose which invoices or parts of invoices get factored, and they can check on the creditworthiness of their clients before deciding for factor an invoice. When it comes to financing, businesses need more control and more agency, and factoring gives them both.