Managing the cash flow of a business can be tricky. When customer bills are due after your utility bills, it can be hard to make ends meet. Sometimes you may need a little extra capital, which is when businesses often turn to factoring. This type of business financing sees you sell your accounts receivables to a lending company to get immediate cash. While selling your accounts receivable may have its place, this is actually a fairly risky way to improve cash flow.
You may have to pay high interest rates. You do not exactly pay the loan off yourself because your customer pays his or her bill directly to the lender. However, you might still lose quite a bit of money. Financing companies rarely pay 100 percent of an account. Instead, you get a portion of the account and lose your rights to the entire bill.
Impact on Customer Retention
Because your customer now technically owes the financing provider, that company can contact your customer to collect the payment. If the lender is rude in any way, it can reflect poorly on your business. In some situations, this trading of receivables could negatively impact your relationship with your customers. In fact, some customers may have such a bad experience with the creditor that they may decide not to work with your business ever again.
Reputable Factoring Companies
Not all factoring companies have a good reputation. Before you make a commitment to a lender, you should do some research on the business. Do they have a good history? Have they been in the business long? Finding a reputable company can help make the process that much better. After all, if the business is known for handling credit calls well, you will not have to worry as much about ruining your relationship with your clients.
Some receivables financing options actually require you to give a personal guarantee. In other words, if your customer fails to pay his or her bill, you may be liable for the bill. In some cases, you may have to put your personal assets up as collateral to ensure the client will actually pay his or her bill.
For many early businesses, factoring is one of the few options available. It does not require a good credit score, so most companies can qualify. However, that does not necessarily mean it is the best option for you. Before you decide to start selling your receivables, do some research to find out if you have any other loan options that come with less of a risk.