Factoring receivables is getting increased attention in the business world. Articles and blogs are explaining the benefits of the factoring option for companies that need to bolster their cash flow, or that want to strengthen their working capital in order to achieve their growth targets. However, many wonder why this would be a superior option for their company, as opposed to securing a long-term bank loan or a line of credit. The following is some information to find when factoring is a good choice for a particular firm.
The Risk Factor
The main factor of determining the viability of the loan is the associated risk. The approval and the lending rate primarily depend on the lender’s assessment of the ability of the client to pay back the loan according on schedule. The chance of late payments and defaults lowers the health of a loan. For this reason, the risk environment should be the main perspective of anyone hoping to obtain a loan. Banks tend to look as the risk of the company applying; 85% of business loan applications are declined by banks. Factoring companies determine the risk involved based on who is paying the invoices in the transaction. If your customers are big companies, with excellent payment history and credit, your invoices are deemed less risky to finance.
Collateral Is King
Collateral has always been the best basis for securing a loan. The closer the collateral is to actual cash, the higher the quality of the collateral. For this reason, the possibility of future growth and revenue, although very attractive to the client company, is not very impressive as collateral to a lender. Growth lending is considered a very risky proposition, particularly in today’s environment. In these situations, lenders impose their own type of guarantee on the loans they approve, often in the form of significant involvement in the company’s day-to-day operations. This is usually an unwelcome intrusion. When you use invoice factoring, the only collateral is your accounts receivable. It’s not so much used as collateral, rather an asset that receives an advance for its value.
Debt Is Unattractive
Regardless of the security and rates of debt, the debt itself is unattractive to both shareholders and potential investors. Debt counts against assets toward determining the company’s profitability. It is a basic type of risk flag for many investment stakeholders. Invoice factoring does not create any new debt. It actually allows for businesses to pay off debt faster.
Let Your Receivables Be Your Asset
Depending on the creditworthiness of your clients, your receivables can be excellent asset. For this reason, on a risk assessment only, receivable factoring may be a better choice for your company than traditional financing. Why not contact us at Universal Funding Corporation with our online rate form to see if we are a match for your financing needs today?