How Do You Know If Factoring Receivables is a Good Option for Your Company?

Factoring receivables is something small or mid-sized businesses often use when they are in need of cash flows. This is nothing but selling your purchase orders to someone else and getting cash earlier, and then it is the factor or the purchaser of your orders who collects the amount from your customers. Whenever a firm decides to make use of factoring receivables they sell off their purchase orders to a factor for eighty or sometimes even ninety percent of the value of the orders. Then it is the responsibility of the collector to get the cash from the customers on behalf of the company. After the receivables are received by the factor, they give an amount to the seller. This amount is the total value of the orders minus the advance the factor paid up front.

What’s the Catch?

The factors deduct around two to three percent from this amount as their fee towards offering factoring service. This is two to three percent of the amount that the factor has to receive or has received from the customers. Let us now try to understand if factoring is good for your business or it is not.

It’s Another Form of Loan

It is important to understand that factoring is just another glorified name of borrowing money and money should not be borrowed under ideal circumstances. In simple words, factoring services should not be availed if there is no need for it. Consider this, with one to three percent that you pay every month towards the services you get your annual fee can be anywhere between twelve to even thirty six percent, which is pretty big. This is too big a fee to pay for just getting a lump sum one month in advance. The businesses can be better off making use of the local banks to borrow the money they need as they offer at much lower interest rates compared to factoring service providers. This would also be a much more cost effective option considering the long run.

It Makes a Great Practical Choice to Maintain Cash-Flow

That being said, the practicality of factoring services can’t be overruled completely. There are cases where this is the only option in front of you. If yours is a small company or business, which has either poor, limited or no credit at all and you need some cash urgently, factoring can be the only option that you may have to resort to. For example, one of the leading trucking factoring companies in USA, Pay4Freight has helped many companies in crunching times. You can learn about Pay4Freight's factoring service by visiting their official website. Similarly, there are many such companies that help small businesses every now and then.

The Best Bet for Small Businesses

Small companies are often unstable and not well established to be self-sustained for all kinds of projects. Then often need one cash injection to get their dices rolling and that is when they approach these factoring companies. With one push of a lump sum they manage to finish some of their initial projects and generate revenue. They don’t necessarily have to do it over and again. As long as these factoring services are availed in a smart way, they can be leveraged to your advantage. But, make sure that you don’t become dependent on these services for your monthly cash requirements.

Author Bio - Robert Beard works for a factoring agency called Pay4Freight and offers his services to leading trucking companies in and around the United States of America.