I guess the best way to answer this question is, what line of business are you in and can you afford the cost to factor your invoices?
You should also start with a clear definition of the term “Factoring”. Factoring is the sale of accounts receivable at a discount, in exchange for immediate cash.
A “factor” is a financing company that pays you cash today for the right to receive future payments from your company’s invoices.
In the interest of keeping this article light, let’s take a summary view of factoring as a method of securing and improving cash flow. Other methods, such as Accounts Receivable financing and traditional lending take on the same underlying meaning in terms of helping your business grow.
Like any good business methodology, there are a couple of questions you must ask yourself first.
- How much of your bottom line profit is there?
- Are you are willing to give up a small percentage for immediate cash?
Factoring comes at a cost. For newer staffing companies with limited capital, it’s a must in order to survive the 60 to 90 days of payroll funding that is necessary to bridge the gap between your client paying your invoice and you paying your employees on a consistent basis.
I’ve been a big proponent of only consulting my clients to work within their means. Some companies use their factoring/funding cash for daily operational expenses besides operational payroll, such as rent, utilities, advertising, officers’ salaries, etc. Too many times, these expenses can get out of hand when strict accounting systems aren’t put into place.
I prefer to use the old school method that was taught to me by my elders. When you get paid, put money into different pots in order to make your payments on a consistent basis. I remember the times when my grandmother would take my grandfather’s money and separate it into different jars; one for rent, one for utilities and one for food. Bottom line is being financially responsible with the cash you receive.
All in all, factoring is a little more complicated than getting a loan from a bank, because your inflow of invoices and the clients you deal with can change rather dramatically. However, what makes factoring complicated is also what makes it appealing.
You can borrow money based on your immediate cash flow needs. Furthermore, the “loan” can be for a very short time period because it’s timed to when the invoices get paid. Finally, as long as your clients pay in a timely manner and you have taken the position to factor in the additional cost, the cost of factoring is better than some other alternatives.
If you have any questions on if your company should be funding or want help reviewing your current funding contract send me a message. I would be happy to help talk through different strategies with you!