How does invoice factoring affect your business?

How does invoice factoring affect your business?

How does invoice factoring affect your business?

Waiting for invoices to be paid has long been a problem for small is Estimated at 3.1 trillion US dollars Any day in the accounts receivable is owed to the U.S. company. When the company delays payment, the problem gets worse. During the COVID-19 economy, improving cash flow is particularly important. This demand for fast cash has led many small businesses to consider invoice factoring-selling accounts receivable to invoice factoring companies at discounted prices and charging certain fees. In addition to being expensive, invoice factoring can also bring other risks to your business. Here is how factoring works and how credit lines can be a better choice.

Factoring is ancient history

Since around 1754 BC (1754 BC (BC) in ancient Babylon, merchants and traders have been using factoring forms, such as Provisions in the Code of Hammurabi — A huge black stone pillar detailing the 282 rules governing business interactions, including establishing appropriate behavior, fines, and even eye-for-eye punishment. As early as 2000 years ago, people believed that the Romans would sell discounted promissory notes and hire a third party to pay off their trade debts.

Code of Hammurabi
Close-up of the text of the Code of Hammurabi written in stone.

Invoice factoring, as the name suggests, began in the UK 1400 years ago. Around 1620, pilgrims took it to the United States. Requires English common law If the merchant wants to sell the invoice to a third party for factoring, it must notify the debtor. However, by 1949, this requirement had been eliminated, when most state governments in the United States passed rules that allowed merchants to make factoring arrangements without notifying the debtor.

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Why companies use factoring

For more than 3700 years, factoring has been a common practice in B2B, and the fact that it has to be good for certain things, right? Basically, this is a way for small businesses to get cash faster, instead of waiting for customers to pay on a net basis, Payment overdue, Or not at all. It can also free company employees from the pressure and workload of following up collections. However, it is understandable that this convenience comes at a price.

Hard costs and hidden costs

Invoice factoring brings several disadvantages to the companies that use it. It may be much more expensive than other types of funds—a large part of your profits is deducted—and it may even expose you to other problems.

  • cost. The discount rate (or factor rate) depends on the factoring period and can be between 2% and 10% of the invoice. In addition, you may need to pay service fees, origination fees, credit check fees, or other fees added by the factoring company.
  • Customer impressions. Some factoring companies may issue a transfer notice and verify your invoice with the debtor. If this happens, your customers may question the stability of your business, because switching to factoring is usually a clear sign of cash flow problems, so they may consider switching to your competitors.
  • contract. Some factoring companies require long-term contracts, forcing you to sign most of the invoices instead of just filling short-term cash shortages.
  • Control your businessIn order to reduce the risk from customers who may default, some factoring companies may even prevent you from using specific accounts with which you have previously established relationships.
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    A better way to maintain cash flow while waiting to be paid

    Small businesses have more options besides factoring to avoid the cash flow problem of delayed payments, even when you can’t ask customers to pay by credit card.One Fundbox’s commercial credit line It can provide you with financial breathing space and allow your operations to continue, although irregular working capital may have peaks and troughs, even in the face of irregular payments accounts receivableMost importantly, your business does not need to provide discounts for this Early Pay, sell your invoices at a loss, or sacrifice your control or reputation over valuable customers.

    This content is for reference only. You should consult your financial, legal or accounting advisers before making any transactions.

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