In today's economic climate, many small to medium sized businesses are turning to Invoice Factoring to maintain their cash flow. Here are 4 reasons why we say the answer should be NO.
1) It is a short term solution to a long term problem. The factor will pay up to 90% of your monthly invoice total - good start, it's money in the bank fairly quickly. Alas that's where it starts to go wrong.
You immediately lose control of the process. The factor wants to first of all recover the 90% advance which he made, and more importantly make a profit for himself. He does not care how he achieves this or whether he upsets your customer or not. So you immediately start to lose customers - OK some you might not want to continue with anyway, but that's not the point - your customer base gets depleted.
2) Many of your customers will be good payers, and when they see they have to pay a factor rather than you, they will start to think there is a problem within your organisation and will start looking elsewhere for a supplier or contractor to carry out the work.Again your customer base gets depleted.
3) Any invoices which the factor fails to collect are returned to you to chase yourself, so you immediately find yourself with potential bad or doubtful debts. Your Aged Debtors Analysis is now showing invoices at least 60 days old, making them harder to collect. Also you now need to allocate resources to try and chase these up to maintain some form of equilibrium.
4) When it comes to the next month, the factor will deduct the amount of debt he did not collect from your ledger balance.That is the FULL balance (100%) So instead of 90%, you might only get 85-87%. sometimes even less so your cash flow immediately starts on a downward spiral. This trend continues month on month,
So here is the question.
Is your business strong enough financially to cope with the decrease in revenue.?
Have you got the resources to chase invoices returned by the factor?
Is your business strong enough to cope with a diminishing customer base?
Do you really want to lose control of your business's finances?
If the answer to any of these questions is NO, then your answer to using Invoice Factoring must also be NO
There are simple methods you can use to ensure YOU get PAID and get the finances your business needs. We'll tell you more in the next blog
