Invoice factoring has been around for years, though it has recently become more prominent as banks continue to deny small business loans. If you need immediate cash for your business, there really is no other way. But is invoice factoring a good idea?
Factoring can be a great idea, or it can be a terrible idea. Why? It depends on the context that it is used. If you utilize invoice factoring as a one time way to get a quick cash flow injection, then factoring is a good idea.
You may arrange for a transactional type of the service, such as single invoice discounting. You can have it in your back pocket as a safety net, in case times get tough.
An instance when factoring isn’t a good idea is when you rely on factoring as a long term solution. While it can provide relief, it doesn’t solve the underlying problem. Your business may not be sustainable if this is the case. A business should not sell receivables solely to stay afloat.
When Is Selling Receivables A Good Idea?
If your business has landed a large contract that will lead to growth, factoring is suitable. The instant cash flow boost will allow you to buy the materials needed, or hire the staff you need to serve your new client.
Another example of it being a good idea may be if you are a new business that can’t bear extra credit risk, or overextended themselves. While it may be difficult to say no when offered a lucrative contract, small business owners should carefully examine proposed credit terms and determine if it really is in their best interest.
If you’ve made this mistake, invoice finance products can usually help.
When it’s A Bad Idea
When it becomes an integral part of getting your business up and running, factoring can be a bad idea. Many small trucking companies incorporate freight factoring into their business plan as a way of funding their venture.
This is not an ideal way to fund the new business, as many tend to get trapped in a vicious cycle of factoring to stay afloat from the beginning.