For manufacturing, invoice discounting facility is the primal source for business finance, aka as invoice factoring financing. That said, if your business is a different kind and faces short-term issues of cash flow, it is okay to consider AR financing. The facility is meant to convert your unpaid invoice into cash irrespective of the kind of business you are into.
The reluctance of banks to lend small businesses has paved the way for invoice factoring companies to easily fill the gap. However, as a business owner, you must have a sensible understanding of when to use these tools and when not to. Of course there would be emergency situations that would be beyond your control, otherwise why would you think of it in the first place. But, that is not always the situation and sometimes, you end up factoring your invoices even if you had resources to get through.
When to avoid factoring?
The fact about this kind of factoring is you get addicted to it. Easy cash coming without any delays and all you have to give in return is a negligent percentage of the overall bill. You finally start depending on them way too much instead of the clients who actually owe you.
Hence, stop relying and start planning. If you are anticipating difficulty in your near future operations, then the first thing you need to do is consult your clients and request them for immediate payments.
When you are in desperate need of cash, chances are you will end up losing a lot of money on commissions and interests. So, act smart and try to cash in the existing receivables by contacting your customers.
When to go for factoring?
Try invoice factoring or AR financing when you want to expand your business or handle orders that are larger than ever. It often happens that you receive an order that is too big than you have ever managed. Since you do not have enough cash to handle a large customer, you can opt for invoice factoring here.
Another situation when you could opt for accounts receivables factoring is if your lender is offering to factor invoices at a percentage that is lower when compared to the regular standards. It is often productive to go for IF at lower rates instead of waiting months to have the invoices cleared.
We would recommend you see this option as a tool to skyrocket your profits instead of a source of solely financing or as an expense. The moment you get this service with purchase orders ready, your business will start to grow faster than you could ever imagine.
Keywords: AR financing, invoice factoring
By: Stephen Perl
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