Debtor factoring can be a great alternative to traditional bank loans, especially if you run a small business with limited access to capital or high-risk factors that make securing traditional funding difficult. It allows businesses to pay the invoices of their most reliable customers immediately, thus encouraging those customers to continue purchasing goods and services from your company in the future. But how does it work? How do you use it? What are the downsides? Find all of this information, and more, in this comprehensive article on everything you need to know about Invoice Factoring For Small Business in Australia.
Why use a factoring company?
A company will buy your invoices at a discount. This means that if you owe $10,000 and have 120 days to pay, they’ll give you around $8,000 in cash. Because they buy your debt, they also take on all of your customer service duties. If a customer calls and asks why their check is late, they’ll refer them to you.
How does debt factoring work?
Debtor Factoring is a form of factoring that specializes in distributing money from unpaid invoices. The process is fairly simple: you, as a business owner, sell your invoices to a third party who will then collect those invoices for you. If an invoice is paid and collected on your behalf, you get paid. It’s that simple. The key benefit of debt factoring is that it can help you eliminate financial risk while increasing cash flow.
To make things even easier, we created a free guide called The Ultimate Guide to Debt Factoring that covers everything you need to know about debt factoring including how it works, how much it costs and why it can be so beneficial for businesses like yours.
When does debtor factoring become necessary?
Before businesses can accept a factoring offer, they need to know whether or not it’s necessary. If your business is profitable, then there’s no point in looking for alternative financing solutions like factoring. However, if you want to continue growing and expanding but don’t have access to capital from traditional sources (such as loans or other lines of credit), then factoring may be just what you need.
Is debtor factoring better than invoice discounting?
There are two main ways for a company to raise money: invoice discounting and factoring. Both methods involve selling invoices for cash in advance of payment by a client. Each has its own unique pros and cons, which makes factoring or invoice discounting better depending on your business needs. Factors often offer better rates than their financial counterparts, but there are other factors that can affect which option is right for you.
There are many advantages of Debtor Factoring that we have not mentioned in our debt funding guide. However, as you can see from some of these numbers, if used properly factoring can be a great asset to a company’s success. Take advantage of our expert advice here on How to Fund Your Business. Having studied all about it, what do you think about it? Does anything stand out for you? Would you factor your business’ accounts receivable or does anything discourage your thoughts against doing so? Let us know by leaving your comments below too!