Invoice Factoring allows a business to sell its accounts receivable to a third party at a discount of usually 1 – 2%, for generating immediate cash flow for the business. The question that comes up is whether such invoice loans are practically feasible in today’s business scenario, when the options for funding and borrowing are vast. The reasons for entrepreneurs preferring business receivable factoring to traditional financing are many. We have discussed a few hereunder, in light of the business environment in the 21st century.
Today, the word ‘monopoly’ is virtually erased from the dictionary of global economics. Every single product or service has a rival waiting in the market. In such a scenario, the last thing an entrepreneur wants is for his business to struggle for cash flow. Invoice factoring lets a business generate immediate cash, albeit at a greater interest rate. But, any businessman worth his salt will tell you that it is always better to lose a few bucks, than to lose a customer.
One of the concerns, which we have heard quite often, is whether the customers will lose faith on the company, if they receive invoices from the factors. Rather, it’s quite the contrary in the current scenario. Factoring gives you a dual benefit – firstly, a specialist would be revering your bills from the customer, which means it will be done in a more professional manner; secondly, with the growing use and benefits of factoring, customers are more than willing to work with a business which keeps its cash flows clean. Moreover, since your payment burden is released, you can deal with your customers without the added stress of recovery of payments.
Accounts receivable lending has been on the rise after the financial crisis hit the economy in the ‘W-recession’. Lending became stricter and compliances were made more difficult. In this scenario, factoring became a major source of funding. This is simply due to the fact that paperwork is negligible, making it extremely convenient. Also, invoice factoring is essentially the sale of an asset for immediate cash. The factors can pay their clients, without increasing the debt burden.
For small businesses and B2B businesses, invoice factoring and accounts receivable factoring are blessings. Factoring has become an important source of funding for these businesses, and is substituting traditional financing means to a large extent. Less paperwork, more convenience, and a transfer of risk of bad debt to a third party; all make invoice factoring a preferred means of finance to the 21st century businesses.