Factoring, known as debtor financing, is when a company buys an immature invoice from another person or company at a price other than its actual price to allow the buyer to profit upon the settlement of the debt. As a means of acquiring cash in advance, factoring is a way better method of financing than acquiring a bank load. Below are some of the advantages associated with factoring.
Optimizes Working Capital
As mentioned before, factoring involves buying one’s immature invoice from one party at a discount from the other party. The discount percentage usually varies from one company to another. The lesser the discount rate, the more money one shall acquire for themselves to advance the expected amount. This shall enable the owners who had factored their cheque to enjoy an optimized working capital compared to when they received a debt for themselves, ending up increasing the liabilities column, which is not suitable for business.
Easy To Acquire
In factoring, acquiring the amount borrowed is much easier than obtaining a loan from a bank. This is because of the requirements that one shall be required to present to a bank before they get to have their request accepted. Again, for one to acquire a bank loan, one should prove their ability to repay the debt and specify precisely when they can repay the debt, depending on probability. The public should also note that one should also sacrifice an asset as security to the bank to qualify for a loan. Failure to do so, the loan approval shall get declined. In the situation where an individual relies on a company for factoring, getting the invoice approved is way much easier and faster than the bank. The individual shall only be required to sign an agreement that shall facilitate the transfer of the invoice from the individual to the factoring company. Then the amount is given to the individual immediately after the invoice is proven valid. It is for the factoring company to await the maturity of the invoice so that they also get back their profits.
The companies that offer factoring services usually demand lower rates to provide ready cash to the clients. These rates are generally low compared to the rates at which banks provide their loans, hence making factoring a choice for the business community. Factoring is usually less of a risk than acquiring a loan from a bank, which the factoring companies prove would demand their exact amount upon failure of the agreed cheque to mature. However, when one fails to pay a bank loan ultimately, getting one’s property being auctioned at a way lower value than its actual value to pay up the loan. This action by the bank affects the assets column of the individual, making their overall value drop, unlike in factoring where the individual would have only returned to the lender the exact amount given to them. The high rates by the bank on loans is a significant disadvantage.