Businesses, much like people, may experience economic hardship. Previously successful companies may suddenly start struggling to cover recurring expenses after an uptick in operational costs or a downturn in revenue. Either scenario could have devastating consequences for the organization.
Creditors might take legal action, and the business could be at risk of losing workers or getting evicted from rented facilities. Just like individuals struggling with financial hardship may turn to payday lenders, businesses trying to overcome temporary economic setbacks may decide to turn to a factor for support. Factors are businesses that purchase accounts receivable invoices to provide immediate capital for a company. Unfortunately, the use of such services can actually worsen a company’s finances.
Factoring doesn’t solve the real issue
Turning to factoring services to cover operating expenses does not address the increase in organizational costs or the drop in revenue that has pushed the company into a difficult financial position. Instead, it simply allows the company to leverage unpaid balances due from customers and clients to cover immediate expenses.
Unfortunately, the company likely needs that revenue to cover future expenses. By hiring a factoring service that takes a portion of the value of those accounts receivable, the company diminishes its future income to stave off its current financial issues. In many cases, factoring begins to work like a revolving line of credit. Organizations have to consistently leverage unpaid invoices to cover operating expenses. Addressing the underlying source of the financial issues is usually a better option.
Restructuring or bankruptcy could help
Unlike factoring, which simply provides a short-term source of revenue, restructuring the business can resolve the underlying issues making it insolvent. Bankruptcy can also help companies address pressing financial matters.
During restructuring, organizations have to take stock of income and obligations and make changes so that the company becomes profitable again. During bankruptcy, it may be possible to eliminate certain financial obligations. While it can be stressful to try to address financial issues at a successful mid-size or larger business, leaders within those organizations can potentially succeed with the right approach and appropriate support.
Discussing restructuring and other solutions for financial insolvency with a skilled legal team can help preserve a business going through short-term financial hardship. The sooner leadership acts to address the issue with permanent solutions instead of temporary support, like factoring services, the better the chances of the company succeeding again in the future.