There are several variables that should be weighed in your decision about whether to factor your accounts receivable.
Aspects to Consider
Your cash flow will be a primary consideration, as will the availability of other forms of financing, such as bank loans. The amount of working capital you have tied up in accounts receivable with payment terms of 30, 60 or 90 days, will influence your decision. The credit-worthiness of your customers will affect the advance rate and the discount rate that factors are willing to offer.
Your line of business will be an important consideration. Businesses that have a significant time lag between the purchase of materials and final collection from the customer may be good candidates for factoring.
The stage of development of your business will also be important. Start-up businesses that cannot obtain bank loans or other sources of financing can benefit from factoring. During periods of rapid growth, factoring may provide a needed injection of cash to generate more revenue by purchasing raw materials and supplies at a discount. It may also be advantageous when your business has been awarded a large job that will require immediate cash outlays for materials and other costs, but that will generate more income.
What Types of Businesses Can Benefit from Factoring
Factoring can be a good option for a small business that is experiencing difficulties with liquidity and needs cash to meet its obligations. In this case, factoring can help you get through these periods without incurring additional debt and without negatively impacting your credit rating. You will be using your own assets – your receivables – to finance your operation. In a highly leveraged business that already has a significant debt load, factoring may be a way of improving cash flow without incurring additional debt. In a business that has tax liens or other credit problems, factoring is an option that is not adversely affected by your credit record, since the factor is more concerned with the customer.