Factoring is the alternative option for financing, which is appropriate for medium and small-sized businesses. Especially, factoring is an excellent option for those firms that don’t have a long track of backing records. In this, “factor” is the company that offers financial services. It helps in boosting the business depending on the unpaid and receivable invoices.
Hence, factoring is standard method exporters use to improve their cash flow. This process helps them draw around 80 percent of the invoice e value of the sales. So, when a company is needed for any short-term cash, they can also use the IT factoring method.
What are the Requirements of factoring?
There are various kinds of conditions and terms for factoring. It majorly depends on the internal practices. The funds for immediate use are given to the seller for the receivable in just 24 hours. While in return, the factor will earn a significant fee for paying the cash.
Generally, the factor keeps a significant percentage of the amount they receive. Moreover, the ratio can also vary. Here, creditworthiness plays an essential role in increasing or decreasing the percentage.
Role of Factoring in Expanding the Business
Hence, from the above discussion, it is clear that factoring plays a significant role in boosting start-ups. Thus, those small firms which don’t have much credit history can take advantage of IT factoring. The factors will agree for the handling of the accounts based on the customers’ creditworthiness.
As a result, there will be a lesser risk for the business owners. Along with that, companies having poor credit scores can opt for this solution. In this way, they can also expand their business among overseas markets by analyzing safe risks.
What are the Limitations of Factoring?
Mainly, businesses having commercial customers can only take advantage of factoring. So, if a company is selling its products to individuals, then this solution is not for them. Along with that, IT factoring is not suitable for those firms having complicated return policies. Furthermore, those companies which receive partial payments and return policies are also not liable for this system.
Hence, those companies having simple debts can take advantage. But, if a business generates a plethora of bills and invoices, then factoring is also not suitable for them.
Drawbacks of Factoring
Moreover, IT factoring is not a cheap option. The factoring fee depends on the purchasing points. So, if a company generates a vast number of invoices cannot be able to use the factoring properly.
Also, the company that uses factoring either has to pay high interest. Or, it has to return the amount received in advance if it cannot payback. Hence, factoring has both its benefits as well as side effects.
In conclusion, factoring adds excellent value to any mid-size or small-sized company. But, from the above discussion, it is evident that there are some limitations. Thus, companies need to keep in mid whole opting for factoring. Henceforth, it is extremely helpful in expanding the business overseas.