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Is factoring a solution to sudden business budget issues?

On Behalf of | Mar 29, 2024 | Business Restructuring & Insolvency

Business executives and business owners are responsible for the management of a company. They may also have invested substantially in the organization, making its financial solvency a top consideration. The company needs to generate revenue to pay wages and must return a profit for investors to recoup what they committed to the company.

When a business begins to struggle, those in leadership roles are often eager to correct the issue as soon as possible. For those providing goods or services and allowing for delays in payment, there are often thousands of dollars in pending invoices in any given month. Outstanding invoices can be a source of frustration when a business faces budgetary challenges.

Most business owners do not want to strain the relationship that they have with clients or customers by altering prior payment arrangements or aggressively engaging in collection activity. Factoring may seem like a reasonable alternative in some cases. Could obtaining factoring services pull a company back from the brink of financial hardship?

How factoring works

Factoring can be useful in certain circumstances because it can convert invoices into capital for business operations. Essentially, the factoring company purchases future invoices or payments on outstanding invoices in return for providing short-term financial assistance to the business. Companies usually charge between 1% and 5% of the invoices’ value for that support, and they only offer an advance on a percentage of their total value.

A factoring service can be a way to obtain short-term financial support for a business with more expenditures than revenue one month. Unfortunately, factoring can snowball into insurmountable debt in some cases where the company doesn’t generate adequate revenue and the issues persist for months.

The terms of factoring contracts can sometimes be highly unfavorable to the business selling its invoices, which may make the review of those terms and assertive negotiation crucial for the company’s recovery from financial hardship. Better contracts leave companies with less at risk.

Exploring various options, including business reorganization or bankruptcy filings, may benefit those worried about the financial solvency of an organization coping with short-term financial setbacks. Executives and owners aware of all of their options may have an easier time protecting the business that they have invested in or help to run.