Imagine you have just delivered an excellent product to your customer and sent them an invoice. Now, you are waiting days, weeks, or even months for the invoice to get paid. A business could bear two or three of such instances but what if late customer payments become a constant factor in your business dealings? It worsens when you face delays in payments even with your high-revenue long-term sales. The negative consequences of late customer payments start showing themselves in the face of piled-up utility bills, rent payments, employee wages, supplier payments, and operational expenses. If this sounds like you, you might need to explore debt factoring to counter your business’s financial situation.
What is debt factoring?
Debt factoring is a financial solution for businesses that are struggling to maintain their cash flow as a result of an inefficient invoice payment system. Through debt factoring, a business sells its completed but unpaid invoices to a factoring company and receives a cash payment consisting of 70%- 90% of the total invoice value. The remaining invoice value (10%-30%) is kept in a reserve account which is then paid to the business minus the factoring fee when the invoices are cleared.
The process of debt factoring
The process of debt factoring can be understood by the following steps:
- After delivering the services or products to customers, the business generates the relevant invoices.
- Under the debt factoring contract, the invoices are sold to a factoring company.
- The factoring company provides a portion of the total invoice value upfront.
- The remaining portion of the total invoice value is kept in a reserve account
- After all the invoices have been collected, the factoring company charges a factoring fee and delivers the cash in the reserve account to the business.
6 Signs Your Business Needs Debt Factoring
If you notice these 6 signs, it’s time that you need external funds to maintain your cash flow.
Struggles with managing cash flow
Your business is drawing in clients and making sales but still, you are always running low on funds to pay your rent, and last-time payments are becoming your habit. If this seems familiar, it seems like you need better invoice collection methods and a cash reserve to use meanwhile to bridge the gap between your expenses and revenue.
Long customer payment terms
If your customers take 15, 30, or 60-plus days to clear out invoices, it automatically affects your working capital and you have less financial freedom to deal with your business operations.
Relying on bank loans
If your business is taking on liability to pay employee wages, suppliers, or rent, it indicates that the cash flow of the business needs improvement. Debt factoring allows you to get access to cash funds without physical collateral and strict credit checks, unlike traditional bank loans.
Rapid business growth
Business growth is a positive sign for its operation, but it comes with increased receivables. Taking on more customer orders can backfire when you don’t have the funds to provide quality services. With debt factoring, you could get funds to resume your business operations and cater to a bigger customer base without drowning in loans and unpaid bills.
Chasing late payments
Long-term invoices require financial resources for a regular follow-up. If your business is exhausting precious time and finances on keeping track of overdue expenses, you could consider debt factoring because it takes on the administrative process of collecting payments.
Seasonal demands
For businesses with seasonal products or services, running low on cash during peak seasons can mean falling behind the competition. The best way to optimise your sales during the high business season is to have a cash reserve so you don’t have to wait for your receivables to catch up on new customers. To get the most out of your debt factoring agreement, make sure you work with a reliable and trustworthy provider. We at ComparedBusiness can help you choose the right factoring company for your next financial solution journey.
