A New Type of Finance: How Debt Factoring is Changing the Financial Landscapeadmin, · Categories: Financing Solutions
Most of the businesses today, particularly small-to-medium (SME) enterprises are shunning away from the traditional forms of financial funding. Hence, they are turning to debt factoring for their financial needs. Debt factoring is basically a form of commercial finance through which a business can obtain cash advance by selling its debts or rather accounts receivables. The third party, known as a ‘factor‘ provides funding to a business that sells their unpaid invoices, commonly provide between 70% to 90% of the monies owed by customers. This article therefore expounds on this as a new type of finance: how debt factoring is changing the financial landscape.
A business enters into a factoring with a lender, keeping in mind that both the parties are secured against the unpaid invoices. Gauging on the debt history of a business, the lender will calculate the amount of money it can finance the business. When approved, the two parties come into agreement and finance is issued within 48 hours in most cases. This a quick way to obtain funding for a cash-strapped business unlike the use of traditional funding methods. A business is encouraged by the instant access to cash funds, which is as valuable as the payment of the 2-3% fee for the invoice value.
The instant cash gives a business a smooth time in keeping its business afloat and going. For small businesses, this cash can also be used for expansion and facilitating growth. Otherwise, for companies or large businesses with employees, this is a good chance to maintain their payroll lest they lose value in the competitive markets. The instant cash could also be used to increase supplies, employ more staff and even take an advantage of prospective opportunities, hence a contra-indication of how debt factoring has changed the financial landscape of businesses today.
In debt factoring, business has taken another shape especially on managing books of accounts. Arguably, a business that utilizes factoring greatly relies on the lender to manage their sales ledgers and in collecting debts accounts. This will help to cut down the costs of administration and other related expenses. Similarly, a business renders itself the bonus of the hassle incurred when collecting bad debt. When there is difficulty in getting debt owed to a business, the factor simply tries to recover the debt from clients in a more courteous and professional way. Hence, the customers of a business are often made aware of whatever arrangements a business might engage in with a lender.
As most of the debts owed to a business usually comes at unpredictable times, while some relenting to two or three months from date of invoice, the smoothness of cash flow is not experienced in such cases. Hence, by debt factoring, the lender will be contracted with the invoices, and they will use the most effective way to ensure that the clients pay the amounts owed in a reliable time, of course without prompting a disappointment. The side note of debt factoring simply relies on the theory of money borrowing on debt security. This is simply as a bank lending a business money which is secured against the outstanding invoices withheld by the business.
Therefore, debt factoring has got to become an easy and quick way to turn invoices of a business into cash. This is as much as the credit worthiness of the business is concerned. Hence, a total change in the financial landscapes of how businesses operates.
There are many types of debt factoring, for examples I recommend you check out Invoice Funders.